HGH - Heartland Group Holdings

[RupertBear]

Ok I had to google Qomolangma....Mount Everest...WOW...interesting

[kiora]

The petition is gaining momentum,or not?:)
https://www.change.org/p/ministry-for-the-environment-create-a-snow-leopard-conservation-sanctuary-in-the-south-island
https://www.stuff.co.nz/timaru-herald/news/102545256/proposal-to-introduce-snow-leopard-to-south-island-crazy

[winner69]

The sanctuary will be sponsored / supported by Heartland and will be known as Hukarere Repara Marae or something like that

Good use of their funds

[Snoopy]

Industry Group Risk

From AR2016 note 18c, the greatest 'business group' risk in dollar terms is agriculture, with $628.202m worth of assets. This represents an increase of $90.916m over the previous year.

$628.202m/ $3,461.292m = 18% of all loans


Regional Risk

From AR2016 note 18b, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $888.080m worth of assets. This represents:

$880.080m/ $3,461.392m = 25% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 12.5% in numerical terms over the year, outstripping the growth of the previous largest region Auckland which only grew by 2% in gross loan amounts (Auckland still covers 24.5% of all loans) . This is a significant change for all other years where Auckland has been the largest market. Given 'Agriculture' loans have grown by 17% over the year, this 'growth' could reflect the compounding of agricultural interest charges into existing loans. According to AR2016 p7, dairy represent 7% of Heartland's total loan book.

0.07 x $3,461.392m = $242m

At an interest rate of 8%, assuming no interest was actually paid, this would increase the value of the Heartland loan book by:

$242m x 0.08 = $19.3m

Since the actual agricultural loan balance increased by $90.9m, we can assume that more net new agricultural loans were taken out, rather than just rolling over the dairy loan book. This is very much a contrast to traditional market leader ANZ.NZ who kept their total rural loan book static over the similar period. Looked at just in agricultural terms, you could say that Heartland are compounding their own problems for the future. But because the loan book in total has grown, reducing Heartland's relative reliance on Auckland is probably a positive.

The multi-year picture is shown below:




20122013201420152016


Largest Regional MarketAuckland (30%)Auckland (30%)Auckland (25%)Auckland (26%)Rest of North Island (25%)


Largest Industry Group MarketAgriculture (24%)Agriculture (21%)Agriculture (16%)Agriculture (17%)Agriculture (18%)





Industry Group Risk

From AR2017 note 18c, the greatest 'business group' risk in dollar terms is agriculture, with $757.004m worth of assets. This represents an increase of $129.334m over the previous year.

$757.004m/ $3,931.239m = 19% of all loans


Regional Risk

From AR2017 note 18b, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $888.080m worth of assets. This represents:

$1.037.873m/ $3,931.239m = 26% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 18% in numerical terms over the year, outstripping the growth of the previous largest region Auckland which only grew by 11% in gross loan amounts (Auckland still covers 24.0% of all loans) .

Given 'Agriculture' loans have grown by 18% over the year, this 'growth' could reflect yet more compounding of agricultural interest charges into existing loans. According to the FY2017 Annual Results presentation (page 15), dairy represented 8% of Heartland's total loan book.

0.08 x $3,931.239m = $314m

At an interest rate of 8%, assuming no interest was actually paid, this would increase the value of the Heartland dairy industry loan book by:

$314m x 0.08 = $25.2m

Since the actual agricultural loan balance increased by $129.334m, we can assume that more net new agricultural loans were taken out, rather than just rolling over the dairy loan book. This is logical when by 30th June 2017, it was becoming clear the dairy crisis was past its worst.

This is very much a contrast to traditional market leader ANZ.NZ who kept their total rural loan book static over the similar period (for the second year in a row) ($NZ19.205m @ 30th September 2017 vs $NZ19.226m @ 30th September 2016). I think agricultural loans will remain the key sector to watch when trying to forecast potential Heartland loan problems for the future.

Looked at just in agricultural terms, you could say that Heartland are potentially compounding their own problems for the future. Or is it just a case a putting more emphasis on their rural roots? Yet because the loan book in total has grown, reducing Heartland's relative reliance on Auckland is probably a positive.

The multi-year picture is shown below:



2012201320142015
20162017


Largest Regional MarketAuckland (30%)Auckland (30%)Auckland (25%)Auckland (26%)
Rest of North Island (25%)Rest of North Island (26%)


Largest Industry Group MarketAgriculture (24%)Agriculture (21%)Agriculture (16%)Agriculture (17%)
Agriculture (18%)Agriculture (19%)



SNOOPY

[kiora]

Thanks Snoopy Interesting observations around yet more compounding of agricultural interest charges into existing loans

[percy]

Industry Group Risk

From AR2017 note 18c, the greatest 'business group' risk in dollar terms is agriculture, with $757.004m worth of assets. This represents an increase of $128.802m over the previous year.

$757.004m/ $3,931.239m = 19% of all loans


Regional Risk

From AR2017 note 18b, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $888.080m worth of assets. This represents:

$1.037.873m/ $3,931.239m = 26% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 18% in numerical terms over the year, outstripping the growth of the previous largest region Auckland which only grew by 11% in gross loan amounts (Auckland still covers 24.0% of all loans) . Given 'Agriculture' loans have grown by 18% over the year, this 'growth' could reflect yet more compounding of agricultural interest charges into existing loans. According to the FY2017 Annual Results presentation (page 15), dairy represented 8% of Heartland's total loan book.

0.08 x $3,931.239m = $314m

At an interest rate of 8%, assuming no interest was actually paid, this would increase the value of the Heartland dairy industry loan book by:

$314m x 0.08 = $25.2m

Since the actual agricultural loan balance increased by $128.8m, we can assume that more net new agricultural loans were taken out, rather than just rolling over the dairy loan book. This is very much a contrast to traditional market leader ANZ.NZ who kept their total rural loan book static over the similar period (for the second year in a row). I think agricultural loans will remain the key sector to watch when trying to forecast potential Heartland loan problems for the future.

The multi-year picture is shown below:




2012201320142015
20162017


Largest Regional MarketAuckland (30%)Auckland (30%)Auckland (25%)Auckland (26%)
Rest of North Island (25%)Rest of North Island (26%)


Largest Industry Group MarketAgriculture (24%)Agriculture (21%)Agriculture (16%)Agriculture (17%)
Agriculture (18%)Agriculture (19%)



SNOOPY

Care needs to be taken when looking at HBL's rural loan book.
A great number of livestock and seasonal loans are short term.
Also we must remember HBL's strategy of fewer large loans,replacing them with more smaller loans.

[Snoopy]

Thanks Snoopy Interesting observations around yet more compounding of agricultural interest charges into existing loans


There isn't any 'proof' in the industry sector figures that Heartland are further compounding their rural loans. They could be strictly enforcing repayment of existing loans, while writing even more new rural business loans than we think. I put in the comparison with ANZ.NZ, because ANZ in New Zealand are the largest rural loan provider in dollar terms. Yet in percentage terms ANZ.NZ's exposure to rural is only just over half that of Heartland. That makes Heartland the greatest rural finance exposure you can buy on the market 'by far' from an NZ investor perspective, helped by the fact that you cannot buy shares in ANZ.NZ directly - you can only buy into the whole ANZ group. Yet, as 'market leader', I do think that the fact that ANZ.NZ has decided not to increase the size of their rural loan book at all as telling. Given Heartland's dairy loan exposure is going up in percentage terms and the rural loan book is growing faster than the loan book average, I do believe it is likely that dairy loans are still being compounded at Heartland though. And Heartland may be 'winning friends' taking a less hard nosed policy than ANZ.NZ!



Care needs to be taken when looking at HBL's rural loan book.
A great number of livestock and seasonal loans are short term.
Also we must remember HBL's strategy of fewer large loans, replacing them with more smaller loans.


I know Heartland are targetting the SME end of the market. I hadn't heard about that extending to the dairy portfolio, but Percy may be right. Of course more small loans making up the rural loan book would not show up in the bare gross loan figures for agriculture.

SNOOPY

[percy]

ANZ lend heavily on rural farm mortgages.They are very long term,for very large sums.
HBL tries to avoid these loans,although they have lent on dairy conversions,which can mount up.
As far as I know ANZ do not lend on livestock or do seasonal loans.A farmer is therefore likely to have a mortgage with ANZ, and use HBL for short term borrowing.

[Snoopy]

We find some valuable information here. Thank you. We have to study why some financial institutions had to bail out or went into receiverships in the past? I myself had some bad experience in the sector. Some financial institutions went into receivership mainly as a result of overexposure to the property sector. By going by their business model, HBL doesn't look like a failed institution.


As those observers who choose to operate the less selective part of their memory will attest, back in 2012 Heartland had massive issues with bad property loans: first selling them off to George Kerr, then buying them back and isolating them in a separate 'investment' category so the rest of the loan book wasn't tainted. The Queenstown property market turned for the better and Jeff and Geoff at Heartland 'got lucky' (from my outside of the tent perspective) or 'used their great skill to turn the company around' (from a Heartland believers perspective). I didn't lose money in the finance sector collapse, so didn't feel the need to recover the money I didn't lose by investing in Heartland early. I have no regrets at all about not being a Heartland shareholder so far. But as Heartland have strengthened their balance sheet and have more of a successful operational record, I would be foolish not to consider investing in a much derisked Heartland from here on in.

I don't see a particular problem with Heartland financing property developments, provided it is kept in proportion in the overall loan book and not considered a 'property can never go down in value' golden goose.

SNOOPY

[Snoopy]

ANZ lend heavily on rural farm mortgages.They are very long term,for very large sums.
HBL tries to avoid these loans,although they have lent on dairy conversions,which can mount up.
As far as I know ANZ do not lend on livestock or do seasonal loans. A farmer is therefore likely to have a mortgage with ANZ, and use HBL for short term borrowing.


I think it would depend on how much equity and hence borrowing headroom a farmer has in her farm Percy. If you have enough credit worthiness, a farmer could draw down a loan against their property and use that money 'however they like' (and that includes buying cows). If the bank was less willing to extend 'property credit' then Heartland could 'come into play'. But so could PGG Wrightson who are prepared to loan 'finishing money' on any livestock that goes through their yards (even though they don't call it a loan!). There are always 'options' out there if you are a good farmer. And if you are 'not so good', then a loan from Heartland gets more likely!

SNOOPY

[percy]

Yes ex UDC man Brian Jolliffe certainly took PGC to near bankruptcy.
That is the reason HBL still avoid property developers like the plague.
Even spread of funding, matched by an equal spread of lending reduces the risks,as does having a great Reverse Equity loan book.
Savvy good farmers [and SME]do not like being too dependent on one lender [bank].

[percy]

I hope HBL have a good strategy for dual listing.?
Has been a total waste of time for two other companies I hold shares in,EBO and TRA.

[winner69]

I hope HBL have a good strategy for dual listing.?
Has been a total waste of time for two other companies I hold shares in,EBO and TRA.

Hope so but this where the word BANK might help

Like the brother / sister arrangements whatever that’s all about

[kiora]

I think it would depend on how much equity and hence borrowing headroom a farmer has in her farm Percy. If you have enough credit worthiness, a farmer could draw down a loan against their property and use that money 'however they like' (and that includes buying cows). If the bank was less willing to extend 'property credit' then Heartland could 'come into play'. But so could PGG Wrightson who are prepared to loan 'finishing money' on any livestock that goes through their yards (even though they don't call it a loan!). There are always 'options' out there if you are a good farmer. And if you are 'not so good', then a loan from Heartland gets more likely!

SNOOPY

Snoops. PGGWrightson finance lending is all through Heartland.Check this out
https://www.pggwrightson.co.nz/Services/Finance

[winner69]

Hope so but this where the word BANK might help

Like the brother / sister arrangements whatever that’s all about

Wrong again ...it will be listed as Heartland Group Holdings

[bull....]

looking to buy udc in the future?

[minimoke]

Restructuring and ASX listing. A bit on the nose for NZ investors. Essentially saying they wont fully support capital raises.

[minimoke]

Don't be so pessimistic. Here's the important bit:

" The restructure will remove constraints on the growth of Group’s business currently arising from Reserve Bank regulations............"Hmm - I would need to look into that in more detail. Reserve Bank "constraints" are generally there for a good reason. You would need an equally good reason to want to operate outside of them.

[RTM]

Don't be so pessimistic. Here's the important bit:

" The restructure will remove constraints on the growth of Group’s business currently arising from Reserve Bank regulations............"

Agree that is the important bit. Does this mean they want to dabble in finance company activity more ? Buy Harmoney perhaps ?
I invested in a bank and will be uneasy if this is the case.
Disc. HBL is my biggest holding....12% of my portfolio.

[Patient Panda]

I hope HBL have a good strategy for dual listing.?
Has been a total waste of time for two other companies I hold shares in,EBO and TRA.

likewise for Briscoes too Percy.
Not sure why so many are hell bent on dual listing and paying extra fees for little to no benefit

[bull....]

plenty of dodgy lending going on in aus

[trader_jackson]

What happens to their banking licence?
Wouldn't want to lose that... investors (ie term depositors) might fret

[Snow Leopard]

It is less than than three years ago that the current structure was put in place:

Heartland - Strategy Update
(https://stocknessmonster.com/announcements/hbl.nzx-272954/)
Worth having a (re)read of the rational at that time.

[winner69]

Heartland Bank per se to become less and less of Group’s activities has focus moves to Harmony, Seniors and other finance related initiatives?

[percy]

Heartland Bank will still operate in NZ as a bank,and still need to operate as per The Reserve Bank of NZ rules and regulations.

[Beagle]

Pretty lukewarm response from fellow shareholders a sentiment shared by this hound as well.
RBNZ stipulations are there for sound reasons and I will need a ton of convincing to vote in favour of yet another reorganization.
As for the cost of an ASX listing and its ongoing costs, come on. really ? My goodness just look at how much capital they have raised from N.Z. shareholders in the last 12-18 months ! Surely they are not implying that they have exhausted their ability to raise money on the NZX or that they need vastly more than what's already been raised ?

[macduffy]

Is this tacit admission of an inability to compete in banking in NZ?

Disc: Not holding.

[percy]

Is this tacit admission of an inability to compete in banking in NZ?

Disc: Not holding.

Quiet the opposite.
HBL's strong NZ organic growth, means it is only fair the Australians should have the same opportunites as their lucky NZ cousins.
"Hi we are from NZ, and are here to help you."....

[minimoke]

Quiet the opposite.
HBL's strong NZ organic growth, means it is only fair the Australians should have the same opportunites as their lucky NZ cousins.
"Hi we are from NZ, and are here to help you."....Yup. And that has worked well for so many NZ companies entering Oz in the past.

[SCOTTY]

The way I see it, NZ is a good steady profitable business but the big growth opportunities are in Australia. The ASX listing will certainly get it noticed and easy access to Aussie capital. Think MQG ��

[percy]

Yup. And that has worked well for so many NZ companies entering Oz in the past.

Yes Ebos and Mainfreight come straight to mind.
HBL do have a very large footprint in Aussie already with their rapidly growing REL business.

[percy]

The way I see it, NZ is a good steady profitable business but the big growth opportunities are in Australia. The ASX listing will certainly get it noticed and easy access to Aussie capital. Think MQG ��

Agreed...…………………………………...

[Beagle]

Yes Ebos and Mainfreight come straight to mind.
HBL do have a very large footprint in Aussie already with their rapidly growing REL business.

MASSIVE opportunity for low risk high margin reverse equity mortgages there with all the major banks capital constrained and unwilling and unlikely to be willing to compete in the foreseeable future. I see the huge potential growth as a key attraction of Heartland compared to other banks. If its necessary to restructure to support this growth then that's what needs to be done and provided its all explained properly and logically I would support it.

[winner69]

Love that comparison with MQH

But some might see Heartland Group Holdings as more ‘risky’ than Heartland Bank and it be related down a bit by fundies.

[percy]

Love that comparison with MQH

But some might see Heartland Group Holdings as more ‘risky’ than Heartland Bank and it be related down a bit by fundies.

A very valid point,however higher EPS & ROE,with the onflowing increasing dividends will attract more "active" investors.

[Snoopy]

Snoops. PGGWrightson finance lending is all through Heartland.Check this out
https://www.pggwrightson.co.nz/Services/Finance


Heartland isn't the full story of financing within PGW Kiora. I was referring to a finance product of the Livestock division called "Go" that is completely independent of Heartland. PGW are very careful not to call it a finance product, so as not to offend Heartland I suppose. But "Go Beef" and "Go Lamb" are ways for financing sheep and cattle for fattening up, with PGW Livestock clipping the animal sale ticket at both ends of the fattening process - but only when the animals are bought and sold through PGW yards. I call "Go" the latest (third) incarnation of PGW Finance, after the previous two incarnations were sold to 'Rabobank' and 'Heartland' respectively. PGW won't admit to having their own finance division again just yet. But "Go" certainly passes the 'finance division' duck test.

PGW still clips the ticket on loans they send Heartland's way. But that arrangement is far less significant in scale, than what PGW themselves are doing with "Go" in house now,

SNOOPY

[Snoopy]

Winner is referring to one aspect of 'the art of profit manipulation', which is one way to interpret the table in my post 9372.

Put succinctly Column 'V' is the 'Impaired Asset Provision' going into the problem loan bucket. Column 'W' is the 'Impaired Asset Expense' leaking out of the problem loan bucket. In any particular six monthly period, there is no reason these two should be exactly the same. Over time though, one might expect the 'Impaired Asset Provision' to 'fully feed' the 'Impaired Asset Expense'. If it didn't, then the impaired assets on the books would eventually disappear. And it is unrealistic to think that a bank would have no impaired assets on the books at all.

"1st April 2014: Seniors 'Reverse Mortgage' Business Acquired." This is the date I recognise as the birth of the 'modern' Heartland we see today. It is probably unfair to compare the 'modern' Heartland with the Heartland that was born with all sorts of legacy property portfolio issues. So I have cut down my table to just show the half year time periods from 1st July 2014 onwards (HY2015 onwards).



Date'Stressed' Loans on the books (X)
Net Financial Receivables (Impairments deducted) (Y)
(X)/(Y) Impaired Asset Expense (V)Write Off (W)
Gross Financial Receivables (Z)
(V)/(Z)
(W)/(Z)


EOHY2015$33.469m$2,722.433m1.23%$5.102m$1.456m$2,7 49.232m0.19%0.05%


EO2HY2015$32.824m$2,862.070m1.15%$7.003m$2.119m$2, 893.724m0.24%0.07%


EOHY2016$29.147m$2,928.601m1.00%$5.610m$14.282m$2, 951.075m0.19%0.48%


EO2HY2016$32.864m$3,113.957m1.06%$7.891m$4.381m$3, 140.105m0.25%0.14%


EOHY2017$28.646m$3,334.800m0.86%$6.892m$6.552m$3,3 61.934m0.21%0.19%


Total$32.498m$28.790m


Average0.22%0.19%



This shows a better picture with 'V' and 'W' more in balance. There is still a solid trend for X (the Stressed Loans of the Books) coming down. But this could be becasue we have a particularly favourable market for borrowers at the moment. Could it be that there are genuinely less stressed loans out there? Does that mean that my complaining about the divergence between the trends of 'Stressed Loans' and 'Impairment Provisions' over time is merely a product of benign market conditions? So there is nothing to worry about?






Date'Stressed' Loans on the books (X)
Net Financial Receivables (Impairments deducted) (Y)
(X)/(Y) Impaired Asset Expense (V)Write Off (W)
Gross Financial Receivables (Z)
(V)/(Z)
(W)/(Z)


EOHY2015$33.469m$2,722.433m1.23%$5.102m$1.456m$2,7 49.232m0.19%0.05%


EO2HY2015$32.824m$2,862.070m1.15%$7.003m$2.119m$2, 893.724m0.24%0.07%


EOHY2016$29.147m$2,928.601m1.00%$5.610m$14.282m$2, 951.075m0.19%0.48%


EO2HY2016$32.864m$3,113.957m1.06%$7.891m$4.381m$3, 140.105m0.25%0.14%


EOHY2017$28.646m$3,334.800m0.86%$6.892m$6.552m$3,3 61.934m0.21%0.19%


EO2HY2017$38.341m$3,545.896m1.08%$8.123m$5.119m$3, 575.613m0.23%0.14%


EOHY2018$44.455m$3,814.979m1.18%$10.416m$8.092m$3, 814.979m0.27%0.21%


Total$51.037m$42.001m


Average0.23%0.18%



Once again I am only considering the time period following the acquisition of the reverse mortgage business, because this time period best reflects the 'modern' Heartland going forwards.

I have defined a 'stressed loan' ( > 90 days overdue (collective loans) OR individually impaired OR Restructured Assets) in the above table as a loan (or part of a loan) that has 'come to management's attention' (by being classified in the accounts as described) , but is not impaired. (I have finished the calculation of the 'Stressed loans' as I have defined them, by subtracting out the impaired portion.) The important thing is that there is no overlap between the loans or portions of loans in the 'stressed loan box' and the 'impaired loan box' in the table above, the way I have defined them.

So what does the above table mean?

The 'impaired asset expenses' and the 'write offs' over time should converge to a similar total. The fact that the summed impaired asset expenses are currently 20% higher than the summed actual write offs, one might interpret as Heartland being conservative in their provisioning. If it had been the other way around, with summed write offs exceeding summed impairment provisions, then one could argue that Heartland were massaging their profits by under-providing for bad debts. There is no evidence of this in the figures. In fact, the increasing divergence between the normalised V/Z and W/Z percentage averages since I last reported on these figures would suggest that Heartland has become slightly more conservative in their bad debt management over the last year.

Because loans are often written off in a lumpy way when compared across adjacent time periods, I don't believe it makes much sense to draw any conclusion from what happens in a single year.

If you believe, as I do, that a good finance company should be able to discern if a loan becomes 'stressed' before it has to be written off , then you should see a correlation between how X/Y moves and how W/Z moves. One would expect the X/Y percentage figure to be greater. If it were the same, then that would be equivalent to saying that every stressed loan ends up written off. Thankfully that doesn't happen!

Looking at the previously quoted post, my eye discerned a decreasing 'Stressed Loan' percentage even as the 'Impairment Provisions' remained steady. This is consistent with being 'too kind' when judging 'Stressed Loans', to the extent that such kindness might backfire leading to a blow out in 'Impairment Provisions at some future date. I am pleased to see that over the last year, that 'apparent trend' has reversed. The Stressed loans are going up with the Impaired Percentage going up. While having more impaired loans/write offs is never great, the fact that they are being tracked and acknowledged in a consistent way is an indicator of less nasty 'bad debt' surprises in the future. This is what we want. The accounts reflecting the true picture of what is happening 'behind the scenes'.

SNOOPY

[iceman]

MASSIVE opportunity for low risk high margin reverse equity mortgages there with all the major banks capital constrained and unwilling and unlikely to be willing to compete in the foreseeable future. I see the huge potential growth as a key attraction of Heartland compared to other banks. If its necessary to restructure to support this growth then that's what needs to be done and provided its all explained properly and logically I would support it.

It has been clear to me from their recent reports that the big growth in REL in Australia will be a strain on cashflow and require lots of funding. As you say Beagle, these loans are very low risk, have very limited competition and HBL is the biggest in Aussie. So I am not surprised they are looking at options in OZ, outside of their current funding from Commonwealth Bank, to support this massive growth opportunity.
But a concern would be if they intend to grow the business outside of Reserve Bank regulations in much more risking "finance company" type lending and is something to watch for in the near future.

Not sure what to think of the dual listing though !

[Snoopy]

Care needs to be taken when looking at HBL's rural loan book.
A great number of livestock and seasonal loans are short term.


Good point. Let's have a look six months down the road to see how the loan allocation into different categories might be evolving.


Industry Group Risk

From AR2017 note 18c, the greatest 'business group' risk in dollar terms is agriculture, with $757.004m worth of assets. This represents an increase of $129.334m over the previous year.

$757.004m/ $3,931,239m = 19% of all loans

Regional Risk

From AR2017 note 18b, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $1,037.873m worth of assets. This represents:

$1,037.873m/ $3,939.231m = 26% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 18% in numerical terms over the year, outstripping the growth of the previous largest region Auckland which grew by 13% in gross loan amounts (Auckland still covers 24.0% of all loans) . Given 'Agriculture' loans have grown by 21% over the year in dollar terms, this 'growth' could reflect the compounding of agricultural interest charges into existing loans. According to Heartland, dairy represent 8% of Heartland's total loan book (but still under the 10% to one customer group earnings cap that I use as a volatility risk indicator).

0.08 x $3,931.239m = $314m

At an interest rate of 8%, assuming no interest was actually paid (i.e it was all capitalised), this would increase the value of the Heartland Agricultural loan book by:

$314m x 0.08 = $25.1m

Since the actual agricultural loan balance increased by $72.0m, we can assume that more net new agricultural loans were taken out, rather than just rolling over the dairy loan book. This is logical when by 30th June 2017, it was becoming clear the dairy crisis was past its worst.

This is very much a contrast to traditional market leader ANZ.NZ who kept their total rural loan book static over the similar period ($NZ19.205m @ 30th September 2017 vs $NZ19.226m @ 30th September 2016)

Looked at just in agricultural terms, you could say that Heartland are potentially compounding their own problems for the future. Or is it just a case a putting more emphasis on their rural roots? Yet because the loan book in total has grown, reducing Heartland's relative reliance on Auckland is probably a positive.

The multi-year picture is shown below:




201220132014201520162017


Largest Regional MarketAuckland (30%)Auckland (30%)Auckland (25%)Auckland (26%)Rest of North Island (25%)Rest of North Island (26%)


Largest Industry Group MarketAgriculture (24%)Agriculture (21%)Agriculture (16%)Agriculture (17%)
Agriculture (18%)Agriculture (19%)





An update on how the half year has shaped up to the previous full year result. The information below has been extracted from the half year report for HY2018.

Our test requirement is:

Highest single new customer group exposure (as a percentage of shareholder funds) <10%

Regional Risk

From reference Note 12b, the greatest regional area of credit risk in dollar terms is Auckland, with $1,074.776m worth of assets. This represents:

$1,074.776m/ $4,213.597m = 26% of all Regional Group Riskloans

So 'normal service has resumed' with the former concentration champion, 'Rest of the North Island' back down to :

$1,065.767m/ $4,213.597m = 25% of all loans.

Auckland at 26% of all loans is high, yet still below historical end of year concentration levels. But I don’t rate that concentration of loans in Auckland as being an issue. Particularly so when ‘Auckland’ is such a varied catch all group. I still don't know if 'Auckland' capture the Harmony investment stake too? The fact that 'Auckland' is likely to cover a whole set of businesses that are headquartered in Auckland but are not restricted to doing business there is why I would tolerate an 'overweight' regional exposure to Auckland.


Industry Group Risk

From reference Note 12c, the greatest 'business group' risk in dollar terms is Agriculture, with $754.754m worth of assets. This represents:

$754.754m/ $4,213.597m = 18% of all loans

This is slightly down on FY2017, when agriculture was

$757.004m/ $3,931,239m = 19% of all loans

Rural loans are quite a broad church. And of those 19 percentage points, only 8 are allocated to the heavily leveraged and volatile dairy market (@EOFY2017). 8 percentage points is still below my 10 percentage point maximum being allocated to one industry. Is the decrease in the rural loan percentage evidence of some of those stretched rural loans being paid down by those hard hit farming customers at last, as Percy hinted at? In dollar terms there is not much of a change in the loan balance, so perhaps I am just seeing what I want to see? That relentless Auckland loan balance, up nearly 14% in just six months, is in itself de-risking the group's rural loan book in percentage exposure terms.



SNOOPY

[blockhead]

Slightly off the present topic,

A while ago we were discussing how hard the internet banking was to use, shortly after that I am sure some of you will have had the chance to download the Heartland App, I downloaded it a week or so ago and it wouldn't operate on my iPhone 5, the app has been updated and it now works. Good stuff except it seems to only give me the ability to look at my savings type a/c's and not move money around a/c's or to another bank. I will copy and paste (below) how the IT dept explained it to me,

"Glad to hear you’re now able to login to the app.

We've released the app with a focus on making savings and deposit accounts easy to manage, so at the moment the app does not support our transactional accounts, like Everyday accounts. Providing this access is on the radar for future developments, as we realise this is something that will be useful for customers like yourself. At this stage we’re unable to give timings around when this feature might become available."

Interested to know how others have found the new app.

Blocky

[minimoke]

Slightly off the present topic,

A while ago we were discussing how hard the internet banking was to use, shortly after that I am sure some of you will have had the chance to download the Heartland App, I downloaded it a week or so ago and it wouldn't operate on my iPhone 5, the app has been updated and it now works. Good stuff except it seems to only give me the ability to look at my savings type a/c's and not move money around a/c's or to another bank. I will copy and paste (below) how the IT dept explained it to me,

"Glad to hear you’re now able to login to the app.

We've released the app with a focus on making savings and deposit accounts easy to manage, so at the moment the app does not support our transactional accounts, like Everyday accounts. Providing this access is on the radar for future developments, as we realise this is something that will be useful for customers like yourself. At this stage we’re unable to give timings around when this feature might become available."

Interested to know how others have found the new app.

BlockyI wouldnt have even thought about that as its a kinda basic thing isn't it?

And then I got wondering. Heck can I transfer money with my banks? So I went into my ANZ and my Kiwibank apps and both allow me to transfer money between my accounts and to other accounts.

[777]

I think the problem is that everything at Heartland goes via the Westpac.

[winner69]

You can do HEAPS AND HEAPS with the Heartland Mobile App ...in theory

https://www.heartland.co.nz/mobile-app/questions

[Snoopy]

The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2016 is derived from note 20 in AR2016 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is dervied from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.



Loan MaturityExpected Behaviour MultipleFY2014 Financial Receivables Maturity: Contracted/ ExpectedFY2015 Financial Receivables Maturity: Contracted/ ExpectedFY2016 Financial Receivables Maturity: Contracted/ Expected


On Demand100% $50.254m / $50.254m $37.012m / $37.012m $84.154m / $84.154m


0-6 months132% $477.190m / $629.445m $664.557m / $877.215m $743.389m / $961.274m


6-12 months132% $367.564m / $483.727m $450.638m / $594.842m $484.420m / $639.962m



Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.



Deposit MaturityExpected Behaviour MultipleFY2014 Financial Liabilities Maturity: Contracted/ ExpectedFY2015 Financial Liabilities Maturity: Contracted/ ExpectedFY2016 Financial Liabilities Maturity: Contracted/ Expected


On Demand3.01% $629.125m / $18.922m $748.332m / $22.450m $718.587m / $21.630m


0-6 months32.4% $748.129m / $242.431m $1,213.450m / $395.102m $892.944m / $289.314m


6-12 months36.4% $538.050m / $195.682m $686.159m / $249.762m $837.844m / $304.975m



Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.



Deposit MaturityFY2014: 'Expected' combined Loan and Deposit CashflowFY2015: 'Expected' combined Loan and Deposit CashflowFY2016: 'Expected' combined Loan and Deposit Cashflow


On Demand $31.332m $14.562m $62.524m


0-6 months $387.014m $482.113m $691.960m


6-12 months $288.045m $345.080m $334.987m


Total $706.391m $841.755m $1,089.471m



I should note here that 'expected' behaviour from future and existing depositors can be modified. Heartland could put a special offer into the market to attract more deposit money if required, for example. Nevertheless even without this I see little cause for concern if customer behaviour pans out as expected.

From an historical perspective, the 'On Demand' net position outlook for FY2015 looked a little weak. But there has been a lot of promotion in the market regarding Heartland's 'on call' rates over the last year. So it is fair to assume that any potential problem in this area has been well and truly fixed.


The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is dervied from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.



Loan MaturityExpected Behaviour MultipleFY2014 Financial Receivables Maturity: Contracted/ ExpectedFY2015 Financial Receivables Maturity: Contracted/ Expected
FY2016 Financial Receivables Maturity: Contracted/ ExpectedFY2017 Financial Receivables Maturity: Contracted/ Expected


On Demand100% $50.254m / $50.254m $37.012m / $37.012m $84.154m / $84.154m
$57.040m / $57.040m


0-6 months132% $477.190m / $629.445m $664.557m / $877.215m $743.389m / $961.274m
$618.271m / $816.118m


6-12 months132% $367.564m / $483.727m $450.638m / $594.842m $484.420m / $639.962m
$521.215m / $688.004m



Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.



Deposit MaturityExpected Behaviour MultipleFY2014 Financial Liabilities Maturity: Contracted/ ExpectedFY2015 Financial Liabilities Maturity: Contracted/ Expected
FY2016 Financial Liabilities Maturity: Contracted/ ExpectedFY2017 Financial Liabilities Maturity: Contracted/ Expected


On Demand3.01% $629.125m / $18.922m $748.332m / $22.450m $718.587m / $21.630m
$836.829m / $25.189m


0-6 months32.4% $748.129m / $242.431m $1,213.450m / $395.102m $892.944m / $289.314m
$1,191.957m / $386.194m


6-12 months36.4% $538.050m / $195.682m $686.159m / $249.762m $837.844m / $304.975m
$729.145m / $265.409m



Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.



Deposit MaturityFY2014: 'Expected' combined Loan and Deposit CashflowFY2015: 'Expected' combined Loan and Deposit CashflowFY2016: 'Expected' combined Loan and Deposit Cashflow
FY2017: 'Expected' combined Loan and Deposit Cashflow


On Demand $31.332m $14.562m $62.524m $31.851m


0-6 months $387.014m $482.113m $691.960m $429.924m


6-12 months $288.045m $345.080m $334.987m $422.595m


Total $706.391m $841.755m $1,089.471m $884.370m



Once again lots of numbers here. Now there are four years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?

The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.

If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposiit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.

From an historical perspective, the 'On Demand' net position outlook for FY2015 looked a little weak. IIRC there was serious promotion of Heartland's 'on call' account at the time and new money flowed in. Some of this money belonged to members of this forum who responded to the incentive of Heartland offering 3% at the time (? - please correct me forum members if I have remember this figure incorrectly) on their call money just as the big banks were reducing their on call deposit rates to near zero (ANZ, BNZ and Westpac now offer just 0.1% on 'at call' deposit money). By EOFY2016 there was a relative abundance of 'net on call cash available' ($62.5m) and that nearly halved to a still acceptable (because Heartland hasn't seen fit to boost it) $31.9m at EOFY2017. I see that the 'on deposit' rate at Heartland was reduced to 2.75% last year, which no doubt took a lot of the froth out of the cash market from those seeing stars when the rate was 3% and above.

Another anomaly was the 0-6 month maturity outlook from EOFY2016 (30th June 2016). IIRC this was a period when there was real uncertainty about the milk price and Heartland may have shied away from short term loan deals to dairy customers over this time, and thus created a higher than originally planned for net maturity of 0-6 month debentures. That 'bump' also looks to be ironed out in the FY2017 figures.

I see Percy is once again 'on the ball' and has replied to this post before I have finished it. You are right about us having this discussion before Percy, this is at least the fourth time. But that doesn't mean it is a waste of time. Short term cash flow is an issue that never goes away. And an imbalance in these figures is an indicator that Heartland might need to offer higher interest rates in the future to fix any upcoming cashflow situation. Offering above market interest rates, if only for a time, means lower profits for shareholders. And that is something that shareholders should know about! Given all of this information is now historical, we can compare what was indicated with what actually happened. It looks like Heartland was not forecasting any unusual cash shortfall on the 'net' existing loan book for FY2018, so no unusually high interest rate deals would be on offer to customers over the 30th June 2017 to 30th June 2018 period. Is that what happened (I haven't kept close tabs of Heartland deposit rates over the year)?

SNOOPY

[percy]

It is the function of all banks' treasury dept to balance supply/demand.
This is why we notice the variations in deposit interest rates at different maturities.
Any bank having an over supply of money [maturities] will lower their interest rate for that time.
If they see more demand, they increase the interest rate for that period.
I would not try to second guess any bank's treasury dept,as that is their job,and all banks seem to manage supply/demand well.
If memory serves me correctly we have had this discussion previously.Nothing has changed in banks' treasury depts. since then.
If they see themselves running short of capital,they either sell something off,or go to shareholders for more funds.

[Snoopy]

The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is dervied from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.



Loan MaturityExpected Behaviour MultipleFY2014 Financial Receivables Maturity: Contracted/ ExpectedFY2015 Financial Receivables Maturity: Contracted/ Expected
FY2016 Financial Receivables Maturity: Contracted/ ExpectedFY2017 Financial Receivables Maturity: Contracted/ Expected


On Demand100% $50.254m / $50.254m $37.012m / $37.012m $84.154m / $84.154m
$57.040m / $57.040m


0-6 months132% $477.190m / $629.445m $664.557m / $877.215m $743.389m / $961.274m
$618.271m / $816.118m


6-12 months132% $367.564m / $483.727m $450.638m / $594.842m $484.420m / $639.962m
$521.215m / $688.004m



Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.



Deposit MaturityExpected Behaviour MultipleFY2014 Financial Liabilities Maturity: Contracted/ ExpectedFY2015 Financial Liabilities Maturity: Contracted/ Expected
FY2016 Financial Liabilities Maturity: Contracted/ ExpectedFY2017 Financial Liabilities Maturity: Contracted/ Expected


On Demand3.01% $629.125m / $18.922m $748.332m / $22.450m $718.587m / $21.630m
$836.829m / $25.189m


0-6 months32.4% $748.129m / $242.431m $1,213.450m / $395.102m $892.944m / $289.314m
$1,191.957m / $386.194m


6-12 months36.4% $538.050m / $195.682m $686.159m / $249.762m $837.844m / $304.975m
$729.145m / $265.409m



Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.



Deposit MaturityFY2014: 'Expected' combined Loan and Deposit CashflowFY2015: 'Expected' combined Loan and Deposit CashflowFY2016: 'Expected' combined Loan and Deposit Cashflow
FY2017: 'Expected' combined Loan and Deposit Cashflow


On Demand $31.332m $14.562m $62.524m $31.851m


0-6 months $387.014m $482.113m $691.960m $429.924m


6-12 months $288.045m $345.080m $334.987m $422.595m


Total $706.391m $841.755m $1,089.471m $884.370m





Time to update the "Liquidity Buffer ratio" for FY2017.

Dear old Colin has now 'left the building', but what better way to immortalise his contribution to society than continuing with the 'Meads Test', and the 'solid as' quote with which he will alwys be identified? When Colin told us all those years ago that a certain finance company was 'solid as' with reference to investing debenture money, the end result was that this cash became tied up in illiquid property developments. So although the company had enough money to pay out their debenture holders 'on paper' and appeared to be operating profitably, the debenture holders could not get their cash back. The 'Meads Test' (as christened by Snoopy) is one method of finding out if a finance sector company really is 'solid as'. The basic data I need to check this out has already been calculated (see above). So let's get going.

To check out the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding) > 10%

On the numerator of the equation, we have borrowings.

HLB Borrowings



1/ Term deposits lodged with Heartland.$2,573.980m


2/ Bank Borrowings$616.838m


3/ Securitized Borrowings total$214.365m


4/ Subordinated Bonds$3.378m


4/ Subordinated Notes$21.180m


Total Borrowings of (see note 13) $3,429.741m



Note 13 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.

Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are, I believe, in relation to the Australian part of the 'Seniors Reverse Mortgage Portfolio'. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These CBA loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes (talking from a 1st July 2017 looking forwards perspective). And Heartland can’t rely on CBA Australia as a source of short-term funds.

The information given in note 13 on the securitized borrowing facilities is as follows:



Securitized bank facilities total all in relation to the Heartland ABCP Trust 1:$300.000mmaturing on 1st February 2018 (*)


less Current level of drawings against this facility$214.365m


equals Borrowing Headroom $85.365m {A}



(*) I do not expect any problem in rolling this facility over for another year.


HLB Lendings vs HLB Borrowings

Customers owe HNZ 'Finance Receivables' of $3,545.897 There is no breakdown in AR2017 (note 11) as to what loans are current or longer terms. However, if we look at note 20, we can derive the expected maturity profile of total finance receivables due over the next twelve months.




On Demand0-6 Months6-12 MonthsTotal


Expected Receivables Due$57.040m+ $816.118m+$688.004m= $1,561.162m


less Expected Deposits for Repayment$25.189m+ $386.194m+ $265.409m= $676.792m


equals Net Expected Cash Into Business$31.851m$429.924m $422.595m$884.370m {B}



If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for debenture holder liquidity. That is the case here.

Summing up:

(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding)
= $85.364m / $884.370m
= 9.7% < 10%

=> Close enough to 10% (with rounding) so Pass Short term liquidity test

Of course there are other ways to satisfy liquidity requirements. Issuing new shares or corporate bonds are two, and Heartland has done both in the past. But sometimes these are not options when market conditions change. This is why it is important to retain some 'headroom' with your existing borrowing arrangements.

SNOOPY

[winner69]

Didn’t beat guidance — disappointing

But was in near the top of the guidance range

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/322214/284489.pdf

[winner69]

Wow ...$77m in F19

That’s +14% ....stronger growth F18

[winner69]

Full year dividend same as last year

What’s happened to ever increasing dividends year on year that some expect/hope for?

[minimoke]

"

Achievements for the year ended 30 June 2018








o Launch of the Heartland mobile app for depositors and savers "

But its an App that doesn't do anything

[winner69]

Tone of announcement pretty downbeat ...not the same excitement as in the past. Is management getting a bit bored and Tired?

A lot of if it wasn’t for this and wasn’t for that the result would have been this sort of stuff — that’s a bit of a worry

That at least will keep snoops busy normalising things.

[Ggcc]

I get the impression they planning to move to the ASX completely over time....

[winner69]

"

Achievements for the year ended 30 June 2018








o Launch of the Heartland mobile app for depositors and savers "

But its an App that doesn't do anything



But it’s an App and that’s what matter

[bull....]

move to aus will bring bigger growth and aquisitions im picking

[percy]

As expected a very stable strong result.
The surprise was the 31% growth in the Australian Reserve equity loan business.I think this explains the need to restructure Heartland, so they can continue to grow this business without NZ Reserve Bank capital ratio constrainments.Will over time greatly improve ROC and ROE.
Also pleasing 12% growth in NZ RELs.I note the average size loan appears to be just $30,000,spread over 15000 clients.
Open for "business," "livestock" etc are gaining traction.
Increase in Harmoney lending still means HBL are being picky on what they lend on.
I also note Heartland are continuing to reduce their risk from large loans,and moving their lending to a greater number of smaller loans.
Motor vehicle lending is still strong.
A very good outlook with continuing strong organic growth,while still driving down costs.
Thank you Heartland.Well done.

[bull....]

As expected a very stable strong result.
The surprise was the 31% growth in the Australian Reserve equity loan business.I think this explains the need to restructure Heartland, so they can continue to grow this business without NZ Reserve Bank capital ratio onstrainments.Will over time greatly improve ROC and ROE.
Also pleasing 12% growth in NZ RELs.I note the average size loan appears to be just $30,000,spread over 15000 clients.
Open for "business," "livestock" etc are gaining traction.
Increase in Harmoney lending still means HBL are being picky on what they lend on.
I also note Heartland are continuing to reduce their risk from large loans,and moving their lending to a greater number of smaller loans.
Motor vehicle lending is still strong.
A very good outlook with continuing strong organic growth,while still driving down costs.
Thank you Heartland.Well done.

good points percy im in agreement the reverse mtge has the opp to be biggest in aus/nz

[Beagle]

Market always forward looking so here's my take on forward guidance.
Mid point of $76m on 560.1m shares gives forecast earnings of 13.57 cps, call it 13.5 cps because some shares will be issued in lieu of dividend during the year.

Now what's the right PE given their growth rate and compared to their peers ? Time for a peer review and detailed analysis of comparative forecast growth rates...will look at that when I have time and post my thoughts.

In the meantime, I wish I could say I was surprised by the rising impairments but I'm not. As I have warned before...start making low deposit loans and they come back and bite you.
Overall a pretty reasonable result I feel. Highlight for me is growth in reverse equity loans especially in Australia, the low point the level of impairments.

Gut feel this is a hold. I feel a PE of about 13.5 is right and on 13.5 cps this gives me a target price of $1.82 by early 2019. At $1.74 less the pending 5.5 cps final dividend due shortly, (net price $1.685) and assuming 9.5 cps in divvies in FY19 holders are looking at a gross yield inclusive of imputation credits of (9.5 / 168.5) / 0.72 = 7.8%. I think that's pretty good and makes the shares a good hold.

[minimoke]

good points percy im in agreement the reverse mtge has the opp to be biggest in aus/nzThe trouble I see with Reverse Mortgages is that there is nothing very special in them. Sure HBL have some first mover advantage. But lets face it. Low loan to asset ratio RE loan, high interest - no reason at all to prevent other banks entering the fray. And then they can do much larger loan /asset ratio loans and start squeezing margins.

[bull....]

The trouble I see with Reverse Mortgages is that there is nothing very special in them. Sure HBL have some first mover advantage. But lets face it. Low loan to asset ratio RE loan, high interest - no reason at all to prevent other banks entering the fray. And then they can do much larger loan /asset ratio loans and start squeezing margins.

if the big banks wanted in the space , they would be. Its still a niche at the moment maybe one day if its big time stuff heartland would be taken over

[Beagle]

The trouble I see with Reverse Mortgages is that there is nothing very special in them. Sure HBL have some first mover advantage. But lets face it. Low loan to asset ratio RE loan, high interest - no reason at all to prevent other banks entering the fray. And then they can do much larger loan /asset ratio loans and start squeezing margins.

All the Australian banks are heavily capital constrained and these loans need capital. The major's in Australia have shown a lack of interest in this type of lending for a VERY VERY long time. I think this ultra low risk Australian lending is the jewel in the crown of the company whereas no deposit unsecured Harmoney lending will continue to be the thorn in their side. Thankfully the former is many times larger than the latter and growing at a vastly quicker pace.

[percy]

if the big banks wanted in the space , they would be. Its still a niche at the moment maybe one day if its big time stuff heartland would be taken over

What would really increase the whole market for RELs is if a bank such as ASB started to offer them.
It would expand the market,and I would expect Heartland would see the sort of growth they are achieving in Australia.

[winner69]

Love the way they present numbers

Tout the EPS going up from 12 cents to 13 cents ......pretty good really

Put a couple of decimal points in the sums

EPS increased from 12.33 cents in F17 to 12.53 cents in F18 - a miserly 1.6%

That’s probably why divie not up ...new capital not working that well (yet)

[winner69]

This is a good achievement

 Significant developments and key initiatives around employee diversity, including partnership with Global Women and Champions for Change, and introduction of flexible working policy

[minimoke]

This is a good achievement

 Significant developments and key initiatives around employee diversity, including partnership with Global Women and Champions for Change, and introduction of flexible working policyI regret selling out of HBL even more now (This one is a cracker - https://www.globalwomen.org.nz/our-people/champions-for-change/champions-for-change/show/483/jan-thomas)

[percy]

Capital ratio.ROE,ROC.
Without having to have satisfactory NZ Reserve Bank capital ratio to support RELs it means Heartland Group will be able to grow RELs ,and use make better use of their capital to grow their Australian operations.
Heartland Bank will off course still need to comply with NZ Reverse Bank banking ratios.

[winner69]

I regret selling out of HBL even more now (This one is a cracker - https://www.globalwomen.org.nz/our-people/champions-for-change/champions-for-change/show/483/jan-thomas)

This ones a cracker ...hopefully not just been by swayed by fellow directors to be a champion and doing it because he truly believes

https://www.globalwomen.org.nz/our-people/champions-for-change/champions-for-change/show/567/jeff-greenslade

[BlackPeter]

This is a good achievement

 Significant developments and key initiatives around employee diversity, including partnership with Global Women and Champions for Change, and introduction of flexible working policy

But I guess the best of the latest results is another free Maori language course! My two new words for today are:

whakaro - a state of mind
tautoko - champion

Hey - this must be worth more than just the measly increase of the EPS by only 1.6%! BTW - what is measly in Maori? They probably never will teach us that particular word :);

[bull....]

actually i was in a rush think my sentencing was wrong it should be hbl would get taken over by a bigger fish if the reverse mtges become big business.

[Beagle]

Love the way they present numbers

Tout the EPS going up from 12 cents to 13 cents ......pretty good really

Put a couple of decimal points in the sums

EPS increased from 12.33 cents in F17 to 12.53 cents in F18 - a miserly 1.6%

That’s probably why divie not up ...new capital not working that well (yet)

Yes it seems trite to have a presentation to analysts and round the EPS to the nearest whole number. I smelled a rat straight away.
Off note 8 http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/322214/284523.pdf in the financials and based on diluted shares on issue last year I get EPS rising from 12.24 cps to 12.535 cps a gain of just 2.4%. The reason is the growth in impairments. But wait there is more....

We have a new accounting standard that requires them to model impairments over the expected life of the loan
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/322214/284490.pdf - see more at page 14.
Two things occur to me.
1. This is proof of what I have been saying all along that their methodology of measuring impairments in the past has been to understate them.
2. Its does seem awfully convenient that they are taking this charge of $14-18m net directly as a charge against equity, i.e. an extraordinary item below the normal profit line...after all we can't have such mundane things impacting management's performance bonus next year can we !

Holding.... but less enthusiastic than I was.

But wait there's even more...its all okay because based on this year's forecast EPS will grow from 12.535 cps to 13.5 cps, growth of 8% !
Once the guru analysts work out that EPS is going to grow at 8% this year the share price will really take off !

[horus1]

I think it is a good result . Have bought more and have a lot. Think women are very important especially for reverse mortgages.

[winner69]

Yes it seems trite to have a presentation to analysts and round the EPS to the nearest whole number. I smelled a rat straight away.
Off note 8 http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/322214/284523.pdf in the financials and based on diluted shares on issue last year I get EPS rising from 12.24 cps to 12.535 cps a gain of just 2.4%. The reason is the growth in impairments. But wait there is more....

I used basic eps ..you used diluted eps ...not much in it

Bad debts up but I reckon ‘proactive provisioning’ had a lot to do with it (wasn’t the result close to guidance)

I see that new accounting standards mean bad debt provisions needs to increase by about $25m next year.

Goes against equity so not a profit impact ....but that’ll help ROE a bit

[winner69]

Yes it seems trite to have a presentation to analysts and round the EPS to the nearest whole number. I smelled a rat straight away.
Off note 8 http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/322214/284523.pdf in the financials and based on diluted shares on issue last year I get EPS rising from 12.24 cps to 12.535 cps a gain of just 2.4%. The reason is the growth in impairments. But wait there is more....

We have a new accounting standard that requires them to model impairments over the expected life of the loan
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/322214/284490.pdf - see more at page 14.
Two things occur to me.
1. This is proof of what I have been saying all along that their methodology of measuring impairments in the past has been to understate them.
2. Its does seem awfully convenient that they are taking this charge of $14-18m net directly as a charge against equity, i.e. an extraordinary item below the normal profit line...after all we can't have such mundane things impacting management's performance bonus next year can we !

Holding.... but less enthusiastic than I was.

But wait there's even more...its all okay because based on this year's forecast EPS will grow from 12.535 cps to 13.5 cps, growth of 8% !
Once the guru analysts work out that EPS is going to grow at 8% this year the share price will really take off !

It’s all a big fiddle eh

Heartland no different in this respect than those awful big Aussie banks

You need to trust bankers and finance company gurus ... that seems rather ironic

[Beagle]

It’s all a big fiddle eh

Heartland no different in this respect than those awful big Aussie banks

You need to trust bankers and finance company gurus ... that seems rather ironic

Well if EPS next year is not at least 13.51 cps so they can round it up in the analyst presentation in FY19 to 14 cps what's the bet that they actually use decimal points to depict EPS more accurately next year lol
This sort of creativity is why I have only a moderate stake and am disinclined to increase it. I think you and Percy will have to be very patient to get your $2.50 :p
7.8% gross yield is the main reason I am holding. Not expecting great things from the SP in the next year, but who knows, I could be pleasantly surprised.

[minimoke]

But I guess the best of the latest results is another free Maori language course! My two new words for today are:

whakaro - a state of mind
tautoko - champion

Hey - this must be worth more than just the measly increase of the EPS by only 1.6%! BTW - what is measly in Maori? They probably never will teach us that particular word :);At the risk of copping a ban I dont understand why they aren't encouraging language skills to communicate with their growing markets.

From Te Puni Kokiri
Māori home ownership rates are low and declining, however most Māori still have a strong desire for homeownership.. Māori are the Housing Corporation New Zealand’s (HNZC) largest applicant group and the second largest occupant group.
Existing barriers to many Māori owning their own homes include:


low incomes;
high debt levels;
poor access to finance;
the cost of home ownership (particularly deposit levels, interest rates and purchase price);
inability to get and use information about home ownership;
inability to raise housing finance against multiple-owned land; and
inter-generational experience.

[percy]

[QUOTE=Beagle;724751.

In the meantime, I wish I could say I was surprised by the rising impairments but I'm not. As I have warned before...start making low deposit loans and they come back and bite you.

.
The increase in impairments comes from provisioning very large loans.
Nothing to do with low deposit loans.

[trader_jackson]

I am probably going to regret this post, but today was the day I sold out of HBL.

At just after 2pm today my sell order was executed at $1.71.

In about 20 months, I had made a very good return, and have enjoyed being on the Heartland train during this period, but I believe, in the short term, there is now more chance of the share price going down, than what there is of it going up.

I also will likely (ie not 100% sure yet) require funds for another upcoming IPO ;), which, depending on the price, I believe will give a higher return than HBL, at least in the short term.

It is likely one day I will be back on the HBL train, and I will be watching with interest.
It is likely I may also consider SUM other investments as well.

Posted 11 April 2017 - now tempting to get back in at under $1.70, if I Mr Market allows... solid guidance for FY19
Just that EPS growth ain't flash

[artemis]

At the risk of copping a ban I dont understand why they aren't encouraging language skills to communicate with their growing markets.

From Te Puni Kokiri
Māori home ownership rates are low and declining, however most Māori still have a strong desire for homeownership.. Māori are the Housing Corporation New Zealand’s (HNZC) largest applicant group and the second largest occupant group.
Existing barriers to many Māori owning their own homes include:


low incomes;
high debt levels;
poor access to finance;
the cost of home ownership (particularly deposit levels, interest rates and purchase price);
inability to get and use information about home ownership;
inability to raise housing finance against multiple-owned land; and
inter-generational experience.


Maori housing. Elephants in the room - babies before being settled and prioritising spending.

And lest you think I am racist, back in the day I worked for several years in the housing space in what was then Maori Affairs (and later in the general social housing sector for several more years). Usual process was assignments on wages for the deposit and mortgage payments, low deposit, cheap interest rate, some houses available cheap as (well) built under the Maori Apprentice Scheme at the time.

When I arrived in the job 80% of the mortgages were in arrears. After 2 years major effort and some creativity about getting some payments in (eg working with employers, accessing Maori land rents) it was down to 40%. There was a lot of visiting homes. I recall one visit where the chap came to the door, and was completely stunned payments were not being made as he was passing the money over to his wife each and every payday.

[bull....]

probably look at udc again next year i reckon

[whatsup]

probably look at udc again next year i reckon

If they did they would really have to have a very hard look at their numbers bearing in mind that the financial peak has passed.

[percy]

probably look at udc again next year i reckon

As always Heartland are waiting to hear back from ANZ.....?

[Beagle]

It’s all a big fiddle eh

Heartland no different in this respect than those awful big Aussie banks

You need to trust bankers and finance company gurus ... that seems rather ironic

Market not silly is it. Its wiped the net effect of their prior inadequate impairment provisioning ($14-18m) straight off the market cap.

[winner69]

Market not silly is it. Its wiped the net effect of their prior inadequate impairment provisioning ($14-18m) straight off the market cap.

Don’t think the markets that clever mate

Share price down today probably because the result was just so so (eps eh)

And I reckon as punters come to grips with the new structure with its inherent increased risks Heartland multiples might shrink a bit

[percy]

Don’t think the markets that clever mate

Share price down today probably because the result was just so so (eps eh)

And I reckon as punters come to grips with the new structure with its inherent increased risks Heartland multiples might shrink a bit

Might increase too.
Outlook.Nett profit $75 mil to $77.Either an 11% or most probably a 14% increase.
All the time risk is reducing,while the quality of lending improves.
…………........................…..Lower big loans.Greater number of smaller loans.
………………………………………….Huge continuing low risk RELs.
………………………………………….Better quality motor vehicle loans via Holden,Jaguar/Landrover.
Yet NIM is still excellent.

[bull....]

as reverse mtge book gets bigger part of there business , risk will reduce alot

[Joshuatree]

CGF Challenger group the elephant in the room to aspire to in aus $4 billion in annuities
Download Document 4.36MB (https://hotcopper.com.au/documentembed?id=uOMxKKzFkiWRTLKhOROKAxjvSDYL4we6z Rj2v%2FR%2B%2BbFiGug%3D)

[Beagle]

Don’t think the markets that clever mate

Share price down today probably because the result was just so so (eps eh)

And I reckon as punters come to grips with the new structure with its inherent increased risks Heartland multiples might shrink a bit


Hmmmm, Its interesting that the 3 cps fall, (wiping about $16.8m off the market cap is bang on the money in terms of the mid point of the net expected effect of the new provisioning standards), maybe the market is more efficient than we give it credit for sometimes or maybe this is just coincidence, who knows ?

Speaking of efficient markets, possibly the PE is also bang on the money, (forward PE about 12.7) at closing price.

I looked at the FY19 projected PE's of NAB, ANZ, WBC, CBA, BEN and BOQ just now. Average forward PE is 12.5 based off 4 traders data. Average projected FY19 EPS growth rate, (to be revised as some companies haven't reported FY18 earnings yet) is 4.4%.

Market pretty efficient in this instance, pricing HBL exactly where it should be at the closing price in my opinion. Holding for yield and maybe a little bit of eps growth ?

[Bjauck]

Maori housing. Elephants in the room - babies before being settled and prioritising spending......... You're right it does sound racist.

When you compare "Maori" stats you need to compare them to cohorts of the general population with similar socio-economic markers such as age and income levels.

As such a high percentage of middle-age high-earners' investment in NZ - is funnelled into residential real estate it forces the price of land up for poorer younger people of prime child-bearing age on median and lower incomes who would otherwise be seekng to put down roots with their own homes. People waiting for middle-age to have children have greater risk of having sickly children.

Is the NZ residential tenancy environment good for good tenants to put down roots safe from eviction?

Disparities in wealth and income levels have widened over the last decades. The poorest need greater will power and but have even less ability to afford the materialism pumped at all of us through modern marketing and advertising.

This does not even delve into the psychological effects on Maori descendants of colonialism and becoming a minority in their own country in which the colonising migrant culture has become dominant...

[Joshuatree]

Thank you for educating us Bj.

[value_investor]

I think the result is solid but unspectacular, though lets keep in mind that the stock really did get way ahead of itself and this is not the fault of management. The unsustainable exuberance showed by investors for it to reach $2.14 was unwarranted and we probably wouldn't be talking about it the way we are at the moment if it was not for that. Not at any point was guidance issued for a profit upgrade but it was priced in like a forgone conclusion.

For the result itself, $67.5m is within the higher range given to us and the guidance to $75-77m touts a 11-14% rise in NPAT which is good. What is interesting is the large jump in impairment expense by 44% or a jump from 5.3% of revenue to 7.1%. Either they are writing bad business up as revenues increase, more business is taken up and more risks are taken.

The cash flow of the business itself in terms of operating is only up slightly and we just had a massive capital raise by the company done. I know the system implementation was a big one off expense and as I said before these always end up costing more than originally thought. Most models are best case scenario's and companies are only to happy to implement first and fix later.

The forward PE is about a 13, as Beagle said its fairly priced with other banks. I still think this one has been operating ahead of its banking counterparts at a higher PE because of the sustained growth it has had but it will have to show me at the HY if it is attainable. The lackluster EPS growth shows that the capital raise has not yet been put to good use returning profits back to shareholders. I think it has to prove whether its a PE15+ stock now as it has been and if it is, will be over $2 again soon. Otherwise I see it staying in the range of $1.75 to $1.90.

As for myself, I'll continue to hold but not be accumulating anymore. I have a small position in this one and the DRP actually favors me when price goes lower. There are better opportunities right now in SUM and OCA imo.

[minimoke]

Thank you for educating us Bj.Its not an education. Its a monologue full of holes and this isn't the thread to respond

[Bjauck]

....
As for myself, I'll continue to hold but not be accumulating anymore. I have a small position in this one and the DRP actually favors me when price goes lower. There are better opportunities right now in SUM and OCA imo. I was in from the almost the beginning and it may be time to consolidate what has become an overweight holding now. It has changed from a growth stock to an income stock for me. It is my NZ banking exposure with a good imputed dividend compared to the Aussie banks.

[Joshuatree]

Its not an education. Its a monologue full of holes and this isn't the thread to respond

Keep digging boy. Going on the some posts here, they needed addressing.

[davflaws]

Keep digging boy. Going on the some posts here, they needed addressing.

People bring different things to this forum. Snoops has a talent for producing reams of fundamental analysis, others have TA expertise, others again have years and years of watching the market and are willing to share that experience with us (relative) newbies. All good.

Still others have a different skill set, and (probably) a different view on many social issues from many of the other posters. I think it is appropriate and important to share these different perspectives on these forums because they have real implications for the commercial success of the organisations we have shares in. In particular, in relation to cultural and gender diversity, there are important implications in Heartland's position. I think these topics are relevant to these forums and worth discussing.

[minimoke]

Keep digging boy. Going on the some posts here, they needed addressing.OK. Lets see where this goes. Is it HBL's "job" to use shareholder funds to "fix" the
psychological effects on Maori descendants of colonialism (assuming this is a problem - which of course it isn't)

[Bobdn]

Maybe not see where this goes. I don't come here for SJW material. If I want that (which of course I never would) there are literally thousands of other sites I could go to. In fact, it's almost impossible to avoid.

[minimoke]

Maybe not see where this goes. I don't come here for SJW material. If I want that (which of course I never would) there are literally thousands of other sites I could go to. In fact, it's almost impossible to avoid.
I learn something new every day - had to look up SJW! Thought it might be Shareholder Justice Warrior but I got that wrong.

[winner69]

I learn something new every day - had to look up SJW! Thought it might be Shareholder Justice Warrior but I got that wrong.

Me too mini ....Maybe we are just ignorant in such matters

[Bjauck]

Maybe not see where this goes. I don't come here for SJW material. If I want that (which of course I never would) there are literally thousands of other sites I could go to. In fact, it's almost impossible to avoid.
You find “social justice” material irrelevant...but I don’t come here for lots of (what I consider to be) irrelevant remarks I have read. Social Justice is part of business these days. Sometimes it is a legal requirement; sometimes it effects product success. It probably always has been relevant - but what is social justice has changed over time.

[Bobdn]

Mind you, on second thoughts, it's not for me to say what people should and shouldn't discuss. If people have skin in the game and think that these social issues have some bearing on HBL, then why not discuss.

I'll leave it at that. It's going to a tough day for my Australian resource stocks. Time for happy thoughts and a cup of tea.

[Bobdn]

Cool, our posts crossed in the mail.

[davflaws]

OK. Lets see where this goes. Is it HBL's "job" to use shareholder funds to "fix" the
psychological effects on Maori descendants of colonialism (assuming this is a problem - which of course it isn't)

I don't agree with the "of course", but I don't think it is Heartland's job to "fix" the problem.

I do think that it is commercially sensible for any large organisation to embrace diversity and to be "institutionally aware" of social issues and able to spot and act on opportunities and threats arising from them.

[Bjauck]

Cool, our posts crossed in the mail. NO Problem Bob! Enjoy your cuppa! I’ll have a coffee.

[BlackPeter]

I don't agree with the "of course", but I don't think it is Heartland's job to "fix" the problem.

I do think that it is commercially sensible for any large organisation to embrace diversity and to be "institutionally aware" of social issues and able to spot and act on opportunities and threats arising from them.

I think that most people would agree that a large organisation should embrace diversity, particularly if this diversity reflects their customer base. I certainly do.

The question however is, whether they should focus with their "diversity" only on one minority (even if this minority has politically a special status) and that way risking to alienate other customers. There are likely more of Heartlands customers fluent in Mandarin or Dutch or German than customers who are fluent in Maori.

Just wondering when they are reflecting this in their company culture and their annual reports?

[minimoke]

I do think that it is commercially sensible for any large organisation to embrace diversity and to be "institutionally aware" of social issues and able to spot and act on opportunities and threats arising from them.
I think we have been through this before - the only "diversity" imperative is that it improves the customer experience and adds value to shareholders. Virtuous activity, such as targeting a specific gender or race for attention, or corporate donations, or "greening" is fine providing it has been put to shareholders and has their backing. Virtue has a direct cost and an opportunity cost - if shareholders are fine with this then all well and good.

[couta1]

I think we have been through this before - the only "diversity" imperative is that it improves the customer experience and adds value to shareholders. Virtuous activity, such as targeting a specific gender or race for attention, or corporate donations, or "greening" is fine providing it has been put to shareholders and has their backing. Virtue has a direct cost and an opportunity cost - if shareholders are fine with this then all well and good. Well said, it's easy for over the top PC nonsense to cloud ones vision these days.

[iceman]

A good article on Heartland behind the paywall on NBR today, for those interested. Clear from that article that they will be seeking more funding in 2019

[Bjauck]

Well said, it's easy for over the top PC nonsense to cloud ones vision these days. Perhaps what is "PC nonsense" for the person in Bulls may not be so for the dude in their hybrid in Ponsonby?

[Marilyn Munroe]

An interesting article about reverse mortgages and some of the risks to a lenders balance sheet appears on the interest.co.nz site which is based on an item in the Financial Times.

It focuses on the dangers of a no negative equity guarantee (NNEG). This applies where the outstanding balance of the reverse mortgage is greater than the proceeds of a sale. This can arise if the mortgagee has greeter longevity than provided for at the beginning or the price of houses goes down. The articles pose the question; are lenders provisioning enough capital against the risks in this type of lending?

If their is no NNEG and the proceeds of sale are less than the outstanding balance the mortgagee or the executor of the estate will have to have to put cash on the table to clear the mortgage debt. You can imagine the reaction of these people when asked to stump up cash.

If there is a NNEG and the proceeds of sale are less than the outstanding balance the lender eats the shortfall.

A cure for cancer and alzheimers plus a ban on foreign house buyers are not beyond the bounds of reason. It would be a shame if Jeff has to go around machine gunning his reverse mortgagees to maintain solvency.

https://www.interest.co.nz/opinion/95361/gareth-vaughan-when-climate-change-was-almost-stopped-theft-century-debt-piled-your

https://www.ft.com/content/ddce25d0-9e20-11e8-85da-eeb7a9ce36e4

Boop boop de do
Marilyn

[iceman]

Interesting MM and certainly something that needs to be watched very carefully with this new type of lending. These loans are very capital intensive and HBL will need to get lots of funding to keep growing Senior Finance in Australia as fast as it is now as well as the reverse mortgages here in NZ, albeit at a much slower uptake rate.
HBL has a '"no negative equity guarantee" on these loans if I remember correctly so will never charge more than the proceeds of the house when sold.

Most of these loans are being taken for home improvements, debt consolidation and extra income. So far most of the reverse mortgages have been fairly small and the LVRs are very low. I've also read somewhere that many of the loans have had much faster payback rate than originally expected.

So I think these loans are very low risk at the moment but certainly something to watch out for and HBL should probably be providing us with more information in this regard in their reports.

[percy]

HBL have $453 mil lent to 15,000 NZ customers.Therefore the average size loan is $30,200.
I think the average house price in NZ is between $450,000 to $500,000.
House prices would have to fall over 80% before HBL hit troubles.I would think all the major banks would hit the wall with a 50% fall,therefore Heartland Bank would be the last bank standing.!!!.
HBL will not be lending a very fit 65 year old at great deal.
However, a 79 year old with a history of heart problems, may be able to borrow more than they thought.?

ps.Today's article, Managing a reverse mortgage, at www.stuff.co.nz,business is worth reading.
Perhaps a kind poster would post the link.?

[freddagg]

ps.Today's article, Managing a reverse mortgage, at www.stuff.co.nz,business (http://www.stuff.co.nz,business) is worth reading.
Perhaps a kind poster would post the link.?

Here it is:
https://www.stuff.co.nz/business/opinion-analysis/106303487/golden-rules-of-taking-out-a-reverse-mortgage-on-your-home

[Snoopy]

So I think these loans are very low risk at the moment but certainly something to watch out for and HBL should probably be providing us with more information in this regard in their reports.


I have always found Heartland's disclosure compares favourably with what is disclosed by other banks.

If you look in the Financial Report 2017, note 26 (Capital Adequacy), you will find the requirements of the Basel 3 standards that must be complied with, including what happens in times of 'economic stress'.

In note 26c, the relative risks of the entire loan book, as estimated by 'relative risk rating' is there. I will reproduce some of that information below in a comparison chart that I have done to compare the relative risk of a Heartland 'Property Investment Mortgage' with a Heartland 'Reverse Residential Mortgage'. These risks vary according to the loan to value ratio (LVR) of each type of loan.



Average Risk Weighting


Loan to Value RatioProperty Investment MortgageReverse Residential Mortgage


>100%100%Not Allowed


100%> and >90%90%


90%> and >80%70%


>80%100%


80%> 40%


80%> and >60%80%


60%>50%



The total property investment mortgage book comes to $46.609m, much smaller than the residential reverse mortgage book of $922.748m. Heartland isn't known for conventional property loans. So this property investment could be the tail of when Heartland's ancestors did do residential conventional mortgages from the old building society days?

Looking at the same table we can see that the reverse mortgages with an LVR <60% total $885.278m.

So $885.278m/$922.748m = 96% of all the reverse mortgages on the books.

That means that if every properties` underlying backing value dropped by 40%, then Heartland would still recover in full 96% of their reverse mortgage loans. Only the remaining 4% of loans would be wiped out (total $37.470m). With shareholder capital of $565.595m on the balance sheet, I don't think such a loss (a fairly extreme stressed scenario) would 'break the bank'.

SNOOPY

[Snoopy]

as reverse mtge book gets bigger part of there business , risk will reduce alot






Average Risk Weighting


Loan to Value RatioProperty Investment MortgageReverse Residential Mortgage


60%>50%



Looking at the same table we can see that the reverse mortgages with an LVR <60% total $885.278m.

So $885.278m/$922.748m = 96% of all the reverse mortgages on the books.


If we look table 26C, on p54 in the Financial Report 2017 we see that the lowest risk loans that Heartland does are to 'Welcome Home Loans' which has a government guarantee, and to low LVR conventional property loans, a market which Heartland is slowly exiting to leave to the big banks. As a broad brush comment, I believe that Bull's assessment of a larger reverse mortgage proportion of the loan book de-risking the total loan portfolio is correct.

So why are Heartland looking at taking the reverse mortgage portfolio out of the loan book, and spinning it off into a separate lending entity that is distinct from the New Zealand registered Heartland Bank? Won't the removal of these relatively low risk loans increase the loan book risk for the remaining Heartland Bank?

Furthermore how will this new stand alone 'Heartland Reverse Mortgage Business' , a strongly cashflow negative business unit remember, gain the cash to grow when it is cut off from Heartland bank?

SNOOPY (struggling to make sense of the restructuring proposal)

[percy]

[QUOTE=Snoopy;725234Looking at the same table we can see that the reverse mortgages with an LVR <60% total $885.278m.

So $885.278m/$922.748m = 96% of all the reverse mortgages on the books.

That means that if every properties` underlying backing value dropped by 40%, then Heartland would still recover in full 96% of their reverse mortgage loans. Only the remaining 4% of loans would be wiped out (total $37.470m). With shareholder capital of $565.595m on the balance sheet, I don't think such a loss (a fairly extreme stressed scenario) would 'break the bank'.

SNOOPY[/QUOTE]

Certainly it would not "break Heartland Bank",but would most probably "break every other bank."

[Beagle]

No question the high margin very low risk reverse home equity part of HBL's loan book is the best part of the business on a risk / reward basis. The very high growth rate of this part of the business is what makes HBL a good hold. On a theoretical ex divvy SP of $1.665 and forward eps of 13.5 cps the forward PE of just 12.33 is a little lower than the 12.5 average of the peer group I follow and the growth rate of 8% in EPS for FY19 quite a bit higher than the average 4.4% of the big Aussie banks, although if you take the average of the growth rate in EPS for FY18 and FY19 and compare it with the Aussie banks we're talking about much the same average level of EPS growth. Conclusion - taking into account the full imputation credits available with HBL dividends HBL is sound hold cum a 5.5 cps divvy at $1.72.
All going well we should beat the previous high of $2.14 sometime in 2020 or 2021 with $2.50 by about 2023 or 2024.
Nearly 8% gross annual divvies in the meantime though so total shareholder return should be solid.

[percy]

So why are Heartland looking at taking the reverse mortgage portfolio out of the loan book, and spinning it off into a separate lending entity that is distinct from the New Zealand registered Heartland Bank? Won't the removal of these relatively low risk loans increase the loan book risk for the remaining Heartland Bank?

Furthermore how will this new stand alone 'Heartland Reverse Mortgage Business' , a strongly cashflow negative business unit remember, gain the cash to grow when it is cut off from Heartland bank?

SNOOPY (struggling to make sense of the restructuring proposal)

All of HBL's huge Australian growth is being constrained by The Reserve Bank of NZ capital requirements.
So HBL's capital will support higher growth in HBL's RELs, and other Australian growth area,such as "open for" products,which should mean a higher EPS and ROE..
You will notice in HBL's presentation, HBL have chosen to reduce high value loans, and increase the number of smaller loans.They have already taken an impairement charge of some of these larger loans.So fewer farm mortgages, and more livestock loans.Shorter terms and higher margins.Same with business loans etc.
Motor vehicle lending is moving from the lower end of the market, to the higher end,ie Holden,Jaguar/Landrover.Lower margin but better quality.
This strategy will mean overall Heartland will have a lot better loan book,however it also means a bit lower NIM.

[percy]

I also think it is not a satisfactory arrangement for The Reserve Bank of NZ to try and monitor a NZ Bank's business/exposure in Australia.
The Reserve Bank of NZ have worked with Heartland to find the right structure for Heartland.Heartland Bank to remain under The Reserve Bank of NZ's regulations,while Heartland's Australian operations are outside their mandate.

[percy]

No question the high margin very low risk reverse home equity part of HBL's loan book is the best part of the business on a risk / reward basis. The very high growth rate of this part of the business is what makes HBL a good hold. On a theoretical ex divvy SP of $1.665 and forward eps of 13.5 cps the forward PE of just 12.33 is a little lower than the 12.5 average of the peer group I follow and the growth rate of 8% in EPS for FY19 quite a bit higher than the average 4.4% of the big Aussie banks, although if you take the average of the growth rate in EPS for FY18 and FY19 and compare it with the Aussie banks we're talking about much the same average level of EPS growth. Conclusion - taking into account the full imputation credits available with HBL dividends HBL is sound hold cum a 5.5 cps divvy at $1.72.
All going well we should beat the previous high of $2.14 sometime in 2020 or 2021 with $2.50 by about 2023 or 2024.
Nearly 8% gross annual divvies in the meantime though so total shareholder return should be solid.

It was a year of two halves for HBL.A poor first half and a great second half.
Strategy of lowering risk is working,while the second half momentum will lead to a very strong coming year,so I expect they will finish the year exceeding their forecasts.
5x $2mil loans totals $10mil.Lowering risk means they are replaced by 50x $200t loans.

[Beagle]

It was a year of two halves for HBL.A poor first half and a great second half.
Strategy of lowering risk is working,while the second half momentum will lead to a very strong coming year,so I expect they will finish the year exceeding their forecasts.
5x $2mil loans totals $10mil.Lowering risk means they are replaced by 50x $200t loans.

I like lots of small loans. A lot less risk.

[Snoopy]

The reverse mortgages with an LVR <60% total $885.278m.

So $885.278m/$922.748m = 96% of all the reverse mortgages on the books.

That means that if every properties` underlying backing value dropped by 40%, then Heartland would still recover in full 96% of their reverse mortgage loans. Only the remaining 4% of loans would be wiped out (total $37.470m). With shareholder capital of $565.595m on the balance sheet, I don't think such a loss (a fairly extreme stressed scenario) would 'break the bank'.


After further thought, my conclusion above may be oversimplifying things. What I have said above is true if all debts to Heartland remain static. But in general a reverse mortgage does not behave like that.

If you take out a 'fixed reverse mortgage amount', then the interest keeps accumulating, even if the amount lent to the homeowner is static. So it is possible that some of those reverse mortgages with an LVR less than 60% will become LVRs greater than 60% with the passage of time as the interest bill accrues. But such an event is more liable to happen if the LVR at the time of a 'property crisis' is above 50% (say). And we don't know how many reverse mortgage loans fall into this category.

Conversely if property values keep going up by enough, we could still have a situation where LVRs are reducing because the increase in property value more than cancels out the interest accruing on the loan.

Things are never quite as simple as they might seem in the finance world. I don't see anything in Heartland's published FY2017 figures that would change my view that Heartland could survive a 40% drop in property prices and still emerge viable of the other side of such an event. The problem I suppose would be a 40% drop in house prices would likely be coupled with downturn in Heartland's other areas of business. So surviving a 40% fall in house prices while farmers and small business people also cut back on their lending simultaneously might not be so easy! Sorry to finish on a gloomy note!

SNOOPY

[percy]

Ask your self which other,if any, Australian or NZ bank could survive a fall in property values of 40%.?

[Beagle]

Another question to ask. When was the last time average real (inflation adjusted) real estate prices fell 40% over a period of a few years ?
During the GFC NO. During the tech wreck of 2000-2001 NO. 1987 sharemarket crisis NO. Great depression of 1929 to 1936 is probably the answer.

[percy]

Another question to ask. When was the last time average real (inflation adjusted) real estate prices fell 40% over a period of a few years ?
During the GFC NO. During the tech wreck of 2000-2001 NO. 1987 sharemarket crisis NO. Great depression of 1929 to 1936 is probably the answer.

Pity you posted that.
I was so looking forward to all of Snoopy's "FAIL TESTS."...…….lol.

[Snoopy]

All of HBL's huge Australian growth is being constrained by The Reserve Bank of NZ capital requirements.


That's true. The key to maximising any bank's 'cash backing resources' means looking for 'loan business' which has an 'Average Risk Weighting' with a low a rating as possible. Why? Because a loan with a low percentage risk weighting will require less bank capital to back it up. And that means any bank capital so freed up can be used for other new loans, thus maximising the size of the bank's loan book.

So what are the three classes of loans that will provide the biggest 'bang for capital' (lowest average risk rating) (excluding regular mortgages which Heartland are leaving to the big banks)?

According to note 26 in the Financial Report for FY2017 these are.

1/ Non Property Investment Mortgage Loan ( <80% LVR): 35%
2/ Non Property Investment Mortgage Loan ( 90%> >80% LVR): 50%
3/ Reverse Residential Mortgages ( <60% LVR ): 50%

So the best way to maximise the 'bang for buck' of a residential reverse mortgage business is to incorporate it within the Heartland bank structure as it is right now! So why are Heartland looking to change their structure again?



So HBL's capital will support higher growth in HBL's RELs, and other Australian growth area, such as "open for" products, which should mean a higher EPS and ROE..


Australian bank lenders are also subject to Basel 3 requirements, the very same requirements that the Reserve Bank of NZ is required to satisfy as a basis for the RBNZ rules. So how is having a new Heartland Australian based entity lending on Australian reverse mortgages going to help Heartland again?

SNOOPY

[fish]

An interesting article about reverse mortgages and some of the risks to a lenders balance sheet appears on the interest.co.nz site which is based on an item in the Financial Times.

It focuses on the dangers of a no negative equity guarantee (NNEG). This applies where the outstanding balance of the reverse mortgage is greater than the proceeds of a sale. This can arise if the mortgagee has greeter longevity than provided for at the beginning or the price of houses goes down. The articles pose the question; are lenders provisioning enough capital against the risks in this type of lending?

If their is no NNEG and the proceeds of sale are less than the outstanding balance the mortgagee or the executor of the estate will have to have to put cash on the table to clear the mortgage debt. You can imagine the reaction of these people when asked to stump up cash.

If there is a NNEG and the proceeds of sale are less than the outstanding balance the lender eats the shortfall.

A cure for cancer and alzheimers plus a ban on foreign house buyers are not beyond the bounds of reason. It would be a shame if Jeff has to go around machine gunning his reverse mortgagees to maintain solvency.

https://www.interest.co.nz/opinion/95361/gareth-vaughan-when-climate-change-was-almost-stopped-theft-century-debt-piled-your

https://www.ft.com/content/ddce25d0-9e20-11e8-85da-eeb7a9ce36e4

Boop boop de do
Marilyn

You make a good point that reverse mortgages might be in demand for health reasons.
We have so many advances and an ageing population.There are already thousands of elderly who are not getting the drugs/surgery that will enable them to live a better quality of life for longer
I dont believe DHB/ministry of health give much priority to funding expensive drugs or surgery for the elderly so maybe more will need a small reverse mortgage for sudden unforseen health expenses

[percy]

Australian bank lenders are also subject to Basel 3 requirements, the very same requirements that the Reserve Bank of NZ is required to satisfy as a basis for the RBNZ rules. So how is having a new Heartland Australian based entity lending on Australian reverse mortgages going to help Heartland again?

SNOOPY

The answers will be known soon enough as the group structure is expected to be in place in November.
The new structure shows their Australian activities will not be as a bank.

[winner69]

The answers will be known soon enough as the group structure is expected to be in place in November.
The new structure shows their Australian activities will not be as a bank.

So the whole entity won’t be as ‘safe as a bank’

[percy]

So the whole entity won’t be as ‘safe as a bank’

Exactly...………………………..
Its going to be interesting.
With more secure lending,ie fewer big loans,better quality motor vehicle lending,and huge growth in REL lending, it will be interesting to see what affect there will be on the overall equity ratio,eps,roe and dividends,and whether Heartland Group's cost of funding will remain compareable to the major banks. .
Going to be difficult to find any businesses to compare Heartland Group to.
Even Heartland Bank NZ will be a lot different to other banks ,because of their REL and motor vehicle,rural etc lending,compared to the major banks' focus on mortgage lending.

[Enjay]

The answers will be known soon enough as the group structure is expected to be in place in November.
The new structure shows their Australian activities will not be as a bank.

I would imagine that the new structure is designed to have the NZ-based entity operating as the registered deposit-taking bank and the Australian-based entity operating as a non-deposit taking lender.

But let's hear that confirmed from HBL!

[freddagg]

Another question to ask. When was the last time average real (inflation adjusted) real estate prices fell 40% over a period of a few years ?
During the GFC NO. During the tech wreck of 2000-2001 NO. 1987 sharemarket crisis NO. Great depression of 1929 to 1936 is probably the answer.

Inflation adjusted resdential prices dropped 40% between 1974 and 1980.
Farm prices 60% between 1982 and 1989

[bull....]

new structure there for big aquisition which they couldnt make under the current rbnz capital requirements ?

[Snoopy]

I would imagine that the new structure is designed to have the NZ-based entity operating as the registered deposit-taking bank and the Australian-based entity operating as a non-deposit taking lender.


Ah, a lightbulb just went on. No deposits from the public taken in Australia, means Heartland's new Australian arm administrating REL loans can avoid the scrutiny of the Reserve Bank of Australia?

If the Reverse Mortgage business is to grow, they will more capital though. If HLB shares are listed in Australia, then they can tap into all that Oz pension fund money. Using Oz pension funds for the future 'today', to fund the luxurious lifestyles of Oz pensioners 'today'! There is a nice kind of symmetry in that. New Heartland shares can be issued to pay for this because the REL business will be earnings per share accretive. But those Oz pension funds are hard nosed and will require a good deal. $A1.50 is a nice round figure, equating to around $NZ1.65. Next stop for the Heartland share price?



But let's hear that confirmed from HBL!


I like the way that Heartland want you heartlanders' vote, without telling you exactly what you are voting for!

SNOOPY

[percy]

I like the way that Heartland want you heartlanders' vote, without telling you exactly what you are voting for!

SNOOPY

I have not downloaded the scheme booklet,all 84 pages of it.
The printed copy is in the mail,so I will wait until I have read it, before commenting.

ps.Being listed in Australia will mean intos etc will be able to invest in Heartland Group.

[winner69]

Snoops ...plenty of info why it’s worthwhile doing all this ....even an Independent Advisors Report

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/322215/284495.pdf

[Snoopy]

Snoops ...plenty of info why it’s worthwhile doing all this ....even an Independent Advisors Report

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/322215/284495.pdf

Thanks Winner. Now here is a question arising.

On p19 of the independent advisors report, we learn the RBNZ restricts Heartland's secured assets to 20% of total assets. Why does this restriction exist? Surely the more loans that Heartland makes on secured assets, the better?

SNOOPY

[winner69]

Thanks Winner. Now here is a question arising.

On p19 of the independent advisors report, we learn the RBNZ restricts Heartland's secured assets to 20% of total assets. Why does this restriction exist? Surely the more loans that Heartland makes on secured assets, the better?

SNOOPY

Snoops, maybe you shouldn’t be thinking about that solely from a lending perspective?

Just a thought without investigating

[Beagle]

Market had a bit of a tantrum about the low EPS growth of just over 2% and saw straight through managements attempt to window dress this by rounding EPS to the nearest full cent in the investor presentation. Surely they weren't naïve enough to think we were all going to accept their 13 cps this year v 12 cps at face value ?

But now the market has vented it disappointment as sure as day follows night all is forgiven and investors are chasing that 5.5 cent fully imputed final dividend, (heck isn't it ironic that they managed to find a decimal point there with the dividend...one wonders why they couldn't round that up to 6 cents seeing as many people take shares in lieu of dividend anyway), and focusing on the promise heaps of growth for FY19, hopefully much of which will be real EPS growth with or without the lack of disingenious rounding.

Speaking of decimal places banks, while I'm having this wee evening rant, they seem quite capable of charging interest rates using one or two decimal places, often ending in a 9.... but my goodness its too hard to show this at face value in an investor presentation ? Surely they weren't trying to be deliberately disingenuous and make themselves look good, surely not, accurate reporting is far more important than just looking good isn't it ?

HBL management need a clip around the ears up about this...might do some barking at the annual meeting if I can be bothered going.

Anyway none of this matters...shares will be rounding up $1.80 soon enough and then on to a nice round $2 hopefully sometime next year. No need for rounding at $2 is there :)

[percy]

Market had a bit of a tantrum about the low EPS growth of just over 2% and saw straight through managements attempt to window dress this by rounding EPS to the nearest full cent in the investor presentation. Surely they weren't naïve enough to think we were all going to accept their 13 cps this year v 12 cps at face value ?

But now the market has vented it disappointment as sure as day follows night all is forgiven and investors are chasing that 5.5 cent fully imputed final dividend, (heck isn't it ironic that they managed to find a decimal point there with the dividend...one wonders why they couldn't round that up to 6 cents seeing as many people take shares in lieu of dividend anyway), and focusing on the promise heaps of growth for FY19, hopefully much of which will be real EPS growth with or without the lack of disingenious rounding.

Speaking of decimal places banks, while I'm having this wee evening rant, they seem quite capable of charging interest rates using one or two decimal places, often ending in a 9.... but my goodness its too hard to show this at face value in an investor presentation ? Surely they weren't trying to be deliberately disingenuous and make themselves look good, surely not, accurate reporting is far more important than just looking good isn't it ?

HBL management need a clip around the ears up about this...might do some barking at the annual meeting if I can be bothered going.

Anyway none of this matters...shares will be rounding up $1.80 soon enough and then on to a nice round $2 hopefully sometime next year. No need for rounding at $2 is there :)

Tomorrow morning increase the Kiwi fruit to three before breakfast.
Helps cure "the rants"...………………….lol.

[Snow Leopard]

Market had a bit of a tantrum about the low EPS growth of just over 2% and saw straight through managements attempt to window dress this by rounding EPS to the nearest full cent in the investor presentation. Surely they weren't naïve enough to think we were all going to accept their 13 cps this year v 12 cps at face value ?

But now the market has vented it disappointment as sure as day follows night all is forgiven and investors are chasing that 5.5 cent fully imputed final dividend, (heck isn't it ironic that they managed to find a decimal point there with the dividend...one wonders why they couldn't round that up to 6 cents seeing as many people take shares in lieu of dividend anyway), and focusing on the promise heaps of growth for FY19, hopefully much of which will be real EPS growth with or without the lack of disingenious rounding.

Speaking of decimal places banks, while I'm having this wee evening rant, they seem quite capable of charging interest rates using one or two decimal places, often ending in a 9.... but my goodness its too hard to show this at face value in an investor presentation ? Surely they weren't trying to be deliberately disingenuous and make themselves look good, surely not, accurate reporting is far more important than just looking good isn't it ?

HBL management need a clip around the ears up about this...might do some barking at the annual meeting if I can be bothered going.

Anyway none of this matters...shares will be rounding up $1.80 soon enough and then on to a nice round $2 hopefully sometime next year. No need for rounding at $2 is there :)

As far as I can remember they have always reported EPS to the nearest cent.
One year it did not go up at all, even though it did do some real up.

Tomorrow morning have a couple of large whiskeys with the three Kiwi fruit and then go back to you basket and sleep the rest of the day.

Repeat daily...

[Snoopy]

I also think it is not a satisfactory arrangement for The Reserve Bank of NZ to try and monitor a NZ Bank's business/exposure in Australia.
The Reserve Bank of NZ have worked with Heartland to find the right structure for Heartland.Heartland Bank to remain under The Reserve Bank of NZ's regulations,while Heartland's Australian operations are outside their mandate.

Percy's 'thought' looks like it has been adopted by the RBNZ as a policy in stone.

Look on the bottom line of Table 8, p23, of the Independent Analysis of the Heartland restructuring proposal. There you will find a Reserve Bank NZ restriction I have never heard of before: There is an undisclosed maximum amount of business that Heartland Bank is allowed to do outside of New Zealand. Yet for reasons unknown, Heartland will not disclose what that maximum figure is!

SNOOPY

[Beagle]

As far as I can remember they have always reported EPS to the nearest cent.
One year it did not go up at all, even though it did do some real up.

Tomorrow morning have a couple of large whiskeys with the three Kiwi fruit and then go back to you basket and sleep the rest of the day.

Repeat daily...

Beagles not huge fans of Kiwifruit, Gold is okay. Might taste better with some whisky though :) Apples are the go. Envy apples are the hounds favorite.

[percy]

Beagles not huge fans of Kiwifruit, Gold is okay. Might taste better with some whisky though :) Apples are the go. Envy apples are the hounds favorite.

It is obvious to all the apples have not worked.
"The ranks" need urgent attention.Your health has now degenerated to an extremely dangerous level.
Forget gold,get used to green...……………..Increase dosage to 4 before breakfast.
Gold may be used only at lunch time, and after dinner.
Use apples only for morning and afternoon tea,in moderation.

[couta1]

It is obvious to all the apples have not worked.
"The ranks" need urgent attention.Your health has now degenerated to an extremely dangerous level.
Forget gold,get used to green...……………..Increase dosage to 4 before breakfast.
Gold may be used only at lunch time, and after dinner.
Use apples only for morning and afternoon tea,in moderation. I'd suggest the Beagle take a nice long ride in his Hemi V8 burning outrageous amounts of fossil fuels, repeat daily for a week or until demerit points hit 99.

[percy]

I'd suggest the Beagle take a nice long ride in his Hemi V8 burning outrageous amounts of fossil fuels, repeat daily for a week or until demerit points hit 99.

Should do the trick...!!!...lol.

[Beagle]

I'd suggest the Beagle take a nice long ride in his Hemi V8 burning outrageous amounts of fossil fuels, repeat daily for a week or until demerit points hit 99.

:lol: :lol:

[RTM]

A little bit interesting that the Former Risk Officer has sold all his shares in Heartland.

[IAK]

A little bit interesting that the Former Risk Officer has sold all his shares in Heartland.

A new deck lol ?

[winner69]

A little bit interesting that the Former Risk Officer has sold all his shares in Heartland.

Probably has finally finished up or about to (Resigned some months ago) .......and gone on his travels

Never actually bought any .....just his very generous bonus paid out in share (LTI)

[percy]

A little bit interesting that the Former Risk Officer has sold all his shares in Heartland.

$1.72.Cum divie..???????????????????/

[winner69]

$1.72.Cum divie..???????????????????/

When you have to sell you have to sell .....but some would say the divie is built into the price anyway

Doubt whether he's too worried about it

[Beagle]

$1.72.Cum divie..???????????????????/

He probably heard that those Hemi powered Chrysler's are good therapy and has to have one to get over the winter blues lol

[RTM]

When you have to sell you have to sell .....but some would say the divie is built into the price anyway

Doubt whether he's too worried about it


Or he might be risk averse.....

[percy]

Or he might be risk averse.....

Classic.
Love it....

[percy]

Well the 84 page Scheme Booklet arrived late this afternoon.
Read the cover so far.
Very small print inside is going to be a challenge to read.

[Beagle]

Well the 84 page Scheme Booklet arrived late this afternoon.
Read the cover so far.
Very small print inside is going to be a challenge to read.

You should have asked for the big print te reo version :)

[percy]

Exactly...………………………….lol.

[winner69]

Well the 84 page Scheme Booklet arrived late this afternoon.
Read the cover so far.
Very small print inside is going to be a challenge to read.

Don’t waste your time

The front cover says in Heartland green VOTE IN FAVOUR

That’s all you need to read



Snoopy will tell you if anything sneaky in the booklet

[percy]

Don’t waste your time

The front cover says in Heartland green VOTE IN FAVOUR

That’s all you need to read



Snoopy will tell you if anything sneaky in the booklet

Sage advice...……………….

[Joshuatree]

[QUOTE=percy;725284]Exactly...………………………..
Its going to be interesting.
With more secure lending,ie fewer big loans,better quality motor vehicle lending,and huge growth in REL lending, it will be interesting to see what affect there will be on the overall equity ratio,eps,roe and dividends,and whether Heartland Group's cost of funding will remain compareable to the major banks. .
Going to be difficult to find any businesses to compare Heartland Group to.

CGF Challenger (ASX) maybe a comparison percy?

2018 Investor presentation and outlook (https://hotcopper.com.au/threads/4356888/)

2018 Analyst Pack (https://hotcopper.com.au/threads/4356894/)

[percy]

[QUOTE=percy;725284]Exactly...………………………..
Its going to be interesting.
With more secure lending,ie fewer big loans,better quality motor vehicle lending,and huge growth in REL lending, it will be interesting to see what affect there will be on the overall equity ratio,eps,roe and dividends,and whether Heartland Group's cost of funding will remain compareable to the major banks. .
Going to be difficult to find any businesses to compare Heartland Group to.

CGF Challenger (ASX) maybe a comparison percy?

2018 Investor presentation and outlook (https://hotcopper.com.au/threads/4356888/)

2018 Analyst Pack (https://hotcopper.com.au/threads/4356894/)

Thanks JT,but annuities. funds management,insurance,and assurance are beyond my limited level of competence.

[Snoopy]

Thanks JT,but annuities, funds management, insurance, and assurance are beyond my limited level of competence.


Does this mean you didn't invest in CBL Insurance!!??!!

I have a theory that annuities, funds management, insurance, and assurance are beyond everybody's level of competence Percy. The rider here being that those who actually work and invest in those industries haven't yet figured this out for themselves yet.....

SNOOPY

[percy]

Totally agree.
Yes I avoided CBL Insurance.
A good few years ago I read a brilliant book on The History of Lloyds of London.
Their business model was a disaster.
Unlimited liability ruined a great number of "names", because none of the Lloyds brokers understood the risks their syndicates were exposed to.
Re-insurance was just a money go round.
I try to invest in simple things I can understand.

[Beagle]

It is obvious to all the apples have not worked.
"The ranks" need urgent attention.Your health has now degenerated to an extremely dangerous level.
Forget gold,get used to green...……………..Increase dosage to 4 before breakfast.
Gold may be used only at lunch time, and after dinner.
Use apples only for morning and afternoon tea,in moderation.

Off topic - I am okay but I admit is has been an extremely grueling winter. Worst flu in at least a decade that still isn't completely right 7 weeks into it. Extra work pressure has also been very tough. Coming out of the very high pressure situation now and looking forward to a holiday soon.
Really sad to hear the news of Greg Boyed, a timely reminder we all need to look after ourselves !
https://www.msn.com/en-nz/news/national/the-kiwi-crisis-we-dont-see-coming-mike-king/ar-BBMivFt?li=AAaeXZz&ocid=spartandhp

Doubt I will bother reading the scheme of arrangement, my modest stake no matter which way I vote won't make any difference to the outcome.

[Joshuatree]

Me too percy, was thinking of reverse mortgage annuities as the connection, CGF are a huge player in aus but cover a lot more as well.it was the only vaguely similar one i currently am aware of but too dissimilar to compare.

[Joshuatree]

And do a little firebreathing Beagle to blow that flu to oblivion and rekindle your mojo. Dont use petrol:eek2::)
1600 × 900 - youtube.com (https://www.google.com/imgres?imgurl=https%3A%2F%2Fi.ytimg.com%2Fvi%2F629 gQNJ6xCQ%2Fmaxresdefault.jpg&imgrefurl=https%3A%2F%2Fwww.youtube.com%2Fwatch%3F v%3D629gQNJ6xCQ&docid=GxltfGQ_0xPASM&tbnid=1QF-TdbsNIZIJM%3A&vet=10ahUKEwjkxvqT4IHdAhWNMN4KHY0SBRkQMwheKBcwFw.. i&w=1600&h=900&client=safari&bih=793&biw=1356&q=Firebreathing&ved=0ahUKEwjkxvqT4IHdAhWNMN4KHY0SBRkQMwheKBcwFw&iact=mrc&uact=8)

[percy]

Off topic - I am okay but I admit is has been an extremely grueling winter. Worst flu in at least a decade that still isn't completely right 7 weeks into it. Extra work pressure has also been very tough. Coming out of the very high pressure situation now and looking forward to a holiday soon.
Really sad to hear the news of Greg Boyed, a timely reminder we all need to look after ourselves !
https://www.msn.com/en-nz/news/national/the-kiwi-crisis-we-dont-see-coming-mike-king/ar-BBMivFt?li=AAaeXZz&ocid=spartandhp

Doubt I will bother reading the scheme of arrangement, my modest stake no matter which way I vote won't make any difference to the outcome.
Take care.
I believe it takes a long time to fully recover.
You think you are right,and it comes back and hits you again.

ps.I am going to give the Scheme Booklet a go,it is just finding the time.

[percy]

Percy's 'thought' looks like it has been adopted by the RBNZ as a policy in stone.

Look on the bottom line of Table 8, p23, of the Independent Analysis of the Heartland restructuring proposal. There you will find a Reserve Bank NZ restriction I have never heard of before: There is an undisclosed maximum amount of business that Heartland Bank is allowed to do outside of New Zealand. Yet for reasons unknown, Heartland will not disclose what that maximum figure is!

SNOOPY

Bottom of page 6.
Its a condition of Heartland Bank's registration.
"Requires Heartland Bank's Australian assets to not exceed 33% of its total assets."

[bull....]

Bottom of page 6.
Its a condition of Heartland Bank's registration.
"Requires Heartland Bank's Australian assets to not exceed 33% of its total assets."

buy udc will easily mean they can fund aus expansion big time

[Snoopy]

Bottom of page 6.
Its a condition of Heartland Bank's registration.
"Requires Heartland Bank's Australian assets to not exceed 33% of its total assets."


Talk about small print! No wonder I missed that footnote! Nothing wrong with your eyesight is there Percy? I wonder why this information was seemingly 'withheld' from their advisors Cameron Partners? 33% of business in Australia seems like a lot before wthe RBNZ starts to worry?

I see that $684m of financial receivables are going to be moved to the new Australian Heartland Entity. Does it have a name yet? How does 'Heartland Oz Not a Bank' sound? I don't think that would breach any ASX naming rules?

Pre split the receivables of the Heartland we have now are listed as $3,882m. So about now the Aussie receivables represent:

$684m / $3,882m = 17.6% of all receivaables

So Heartland must be confident that their Aussie loan book will likely double in size in the short to medium term? And that is assuming a constant sized NZ loan book going forwards which is probably an underestimation?

SNOOPY

[percy]

The real meat is on page 60.
That is page 19 of Cameron Partners report.
Section 3.3.2 RBNZ constraints on Heartland Australia growth.
Secured Asset Lending.
RBNZ restricts to 20%of total assets.Currently up to 18%/
85% of these secured assets are related to Australian reverse mortgage business,and 15% to NZ motor vehicle financing.
Post restructure the secured asset limited ratio will decrease to approx. 3%.
"This will remove the constraint to growth in the Australian business and create significant additional new headroom for secured asset funding within the Heartland Bank business."
So the last sentence is what we were looking for.Growth in Australia and more headroom for NZ Bank using existing capital..

[Snoopy]

Snoopy wrote:
"Thanks Winner. Now here is a question arising.

On p19 of the independent advisors report, we learn the RBNZ restricts Heartland's secured assets to 20% of total assets. Why does this restriction exist? Surely the more loans that Heartland makes on secured assets, the better?"

Snoops, maybe you shouldn’t be thinking about that solely from a lending perspective?

Just a thought without investigating


The real meat is on page 60.
That is page 19 of Cameron Partners report.
Section 3.3.2 RBNZ constraints on Heartland Australia growth.
Secured Asset Lending.
RBNZ restricts to 20%of total assets.Currently up to 18%/
85% of these secured assets are related to Australian reverse mortgage business,and 15% to NZ motor vehicle financing.
Post restructure the secured asset limited ratio will decrease to approx. 3%.
"This will remove the constraint to growth in the Australian business and create significant additional new headroom for secured asset funding within the Heartland Bank business."
So the last sentence is what we were looking for.Growth in Australia and more headroom for NZ Bank using existing capital..

Yes I did manage to read that bit, at least. I still can't make sense of it though. Winner suggested I should think of it 'not solely from a lending out perspective'. Is he suggesting that Heartland should keep at least 20% of their loan book as cash on hand to secure their loans? I don't think Heartland have ever had that much cash to back their loans!

Perhaps the answer is for Heartland to only lend on unsecured loans, to get around this secured loan restriction?

A still baffled.....

SNOOPY

[winner69]

Yes I did manage to read that bit, at least. I still can't make sense of it though. Winner suggested I should think of it 'not solely from a lending out perspective'. Is he suggesting that Heartland should keep at least 20% of their loan book as cash on hand to secure their loans? I don't think Heartland have ever had that much cash to back their loans!

Perhaps the answer is for Heartland to only lend on unsecured loans, to get around this secured loan restriction?

A still baffled.....

SNOOPY

Snoops ....still haven’t looked at closely but I think the restriction applies to how much borrowing they can do using some specific finance assets as security. The bit that percy posted points to what they have securitised doesn’t it (mainly reverse mortgages and motor vehicles)

Thinking of it this way less baffling?

Then again I might be completely wrong

[percy]

Snoops ....still haven’t looked at closely but I think the restriction applies to how much borrowing they can do using some specific finance assets as security. The bit that percy posted points to what they have securitised doesn’t it (mainly reverse mortgages and motor vehicles)

Thinking of it this way less baffling?

Then again I might be completely wrong

That is the way I read too.
20% of assets as [locked up] security.
Only 15% of the 20% was over motor vehicle lending,while 85% of the 20% was on RELs.
A lot of headroom once REL lending is separated out.

[Snoopy]

An update from last years equivalent reporting period, HY2016.

The underlying debt of the company according to the HY2017 statement of financial position is:

$39.138m + $5.986m = $45.116m

To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the problem 'Investment Properties' and the unspecified 'Investments' from that total:

$3,820.147m - ($3,394.800m +$6.827m + $298.519m) = $119.991m

We are then asked to remove the intangible assets from the equation as well:

$119.991m - $65.584mm = $54.407m

Now we have the information needed to calculate the underlying company debt net of all their lending activities:

$45.116m/$54.407m= 82.9% < 90%

This compares unfavourably with the comparatuve half year period figure of 56.0%, and even less favourably with the more recent 37.4% figure from FY2016 date (30th June 2016). The rapid deterioration in this statistic means we shoudl keep watching it. But being comfotably within covenant boundaries, there is no casue for medium term concern.

Result: PASS TEST



An update from last years equivalent reporting period, HY2017.

The underlying debt of the company according to the HY2018 statement of financial position is:

$26.020m + $6.722m = $32.742m

(Note: there seems to have been some change in policy that has allowed Heartland to substantially understate these underlying liabilities in comparison with the previous half year comparative period).

To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the problem 'Investment Properties' and the unspecified 'Investments' from that total:

$4,307.484m - ($3,783.091m +$1.724m + $294.297m) = $228.372m

We are then asked to remove the intangible assets from the equation as well:

$228.372m - $71.365mm = $157.007m

Now we have the information needed to calculate the underlying company debt net of all their lending activities:

$32.742m /$157.007m= 20.9% < 90%

This compares very favourably with the comparatuve half year period figure of 82.9%, and even favourably with the more recent very good 37.6% figure from FY2017 date (30th June 2017). If there was a hint of things going off the rails last comparable half year, it looks like it has all been brought back.

Result: PASS TEST

SNOOPY

[Snoopy]

Updating for the half year result HY2017. The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

EBIT (high estimate) = $135.789m-$35.966m= $99.823m

Interest expense is listed as $56.828m.

So (EBIT)/(Interest Expense)= ($99.823m)/($56.828m)= 1.79 > 1.20

Result: PASS TEST, an improvement from the HY2016 (1.55) position. And also an improvement on the full year position as of 6 months ago FY2016 (1.65)



Updating for the half year result HY2018. The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

EBIT (high estimate) = $152.471m-$40.248m= $112.223m

Interest expense is listed as $62.377m.

So (EBIT)/(Interest Expense)= ($112.223m)/($62.377m)= 1.80 > 1.20

Result: PASS TEST, near identical to the HY2017 (1.79) position. And also almost identical the full year position as of 6 months ago FY2017 (1.79). Has HBL found its own 'sweet spot' with this statistic?

SNOOPY

[Snoopy]

Snoops ....still haven’t looked at closely but I think the restriction applies to how much borrowing they can do using some specific finance assets as security. The bit that percy posted points to what they have securitised doesn’t it (mainly reverse mortgages and motor vehicles)

Thinking of it this way less baffling?

Then again I might be completely wrong



That is the way I read too.
20% of assets as [locked up] security.
Only 15% of the 20% was over motor vehicle lending,while 85% of the 20% was on RELs.
A lot of headroom once REL lending is separated out.


Just to bring other readers up to speed with what on earth we are talking about....

A 'Securitzed Loan' is when a bunch of 'similar' loans are bundled up together and sold, usually to a 'parent bank', as a 'package'. The 'parent bank' then gets to manage this collective packaged loan itself, collecting the interest due directly from the end customer. However, the seller of these loans (Heartland) does not get to remove these loans from their books, if Heartland is left with some residual guarantee on these loans if they go wrong. In the case of Heartland's REL portfolio in Australia, the 'parent bank' (see note 24 in AR2017 on Structured Entities). is the Commonwealth Bank of Australia (CBA) (see note 13 in AR2017 on Borrowings). However, in the case of Seniors Finance in Australia, I am not sure if the precise arrangements of any guarantee that Heartland have supplied have ever been disclosed.

Suffice to say that the amount of any guarantee, if called upon, could be substantial. Perhaps that is the reason that the Reserve Bank of New Zealand has placed a limit on the percentage of securitized loans (if that is what the Heartland restructuring report is referring to) made as part of a total loan portfolio? [assuming my explanation is relevant at all of course!].

Unfortunately the glossary of document in which Heartland is asking for your vote does not explain exactly what is meant by the phrase 'Secured Loan' :-(

SNOOPY

[Snoopy]

Updating this number for the half year HY2017

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland HYR2017

= $528.002m/$3,820.147m = 13.8%

This is a decrease on the HY2016 position (14.5%), and also an decrease on the FY2016 position of 6 months ago (14.1%). This decrease is despite $20m in new capital being raised from institutions during the half year. So Heartland are driving their loan book forwards, and making full use of that new capital.



Updating this number for the half year HY2018

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland HYR2018

= $641.339m/$4,307.484m = 14.9%

This is an increase on the HY2017 position (13.8%), and also an increase on the FY2017 position of 6 months ago (14.1%). These relative increases are largely attributable to the 40.215m new shares being issued over FY2017 and 34.838m new shares issued during HY2018 (on 14th December 2017) as part of a pro-rata rights issue. In addition to this, the dividend reinvestment plan has paid a smaller yet still important part in shoring up the company's equity position.,

SNOOPY

[Snoopy]

Note that in comparison to last year, I have revised my standard so that Heartland should carry 17% of sharehiolder equity in relation to the value of its loan book. This change of standard is in recognition of Heartland now being able to be thought of as a 'middle tier' finance player, instead the smaller rather more risky player that it started out as.

Tier 1 or Tier 2 capital adequacy is noted under section 19A (Capital Ratios) in the Heartland HY2017 report.

$3,334.800m of loans are outstanding. 17% of that figure is:

0.17 x $3,334.800m = $575.4m

Heartland has total equity of $528.002m. But from note 18A, only $457.631m is Tier 1 capital. The difference is because intangible assets, deferred tax assets, hedging reserve effects and defined benefit superannuation fund assets on the books must be adjusted for.

On top of the Tier 1 assets, there is Tier 2 Capital: a subordinated bond of $0.970m, offset by a $2.095m 'Foreign Currency Translation Reserve' adjustment. Somewhat bizarrely, this results in a negative Tier 2 equity balance of $1,125m being declared on the books.

Nevertheless, however the total tier capital is added together, it is still below my "17% of loan" target no matter what the tier classification of capital buffering any potential problems with the loans.

Result: FAIL TEST

Note: Post balance date, Heartland has raised an additional $20m capital from shareholders which will go some way to fixing this issue. If the loan book has not enlarged further since balance date, this would result in a loan book to total equity ratio of:

($528.002m + $20m) / $3,334.800m =16.4%

This brings the 'Total Tier Capital' to loan book ratio back to the level it was at FY2016 balance date (30/06/2016). If this is the level of capital that Heartland are comfortable with and the loan book continues to grow, then logic would suggest further capital raising initiatives could be required by Heartland in the near future.

In fact, a new offer of approximately A$15m of Tier 2 regulatory capital to wholesale investors in Australia, has already been signalled in p13 of the half year results presentation.


As a middle tier finance industry player, I deem that Heartland should carry 17% of sharehiolder equity in relation to the value of its loan book. Note this is a higher standard than Reserve Bank requirements, because I am more worried about losing capital than the Reserve Bank is!

Tier 1 or Tier 2 capital adequacy is noted under section 18A (Capital Ratios) in the Heartland HY2018 report.

$3,783.091m of loans are outstanding. 17% of that figure is:

0.17 x $3,783.091m = $643.14m

Heartland has total equity of $641.339m. But from note 18A, only $562.786m is Tier 1 capital. The difference is because intangible assets, deferred tax assets, hedging reserve effects and defined benefit superannuation fund assets on the books must be adjusted for.

On top of the Tier 1 assets, there is Tier 2 Capital: subordinated bonds totalling $16.314m, plus a $1.455m 'Foreign Currency Translation Reserve' adjustment. This results in a posittive Tier 2 equity balance of $17.769m being declared on the books.

Nevertheless, if the total 'tier capital' is added together - which comes to $580.555m - it is still below my "17% of loan" target no matter what the tier classification of capital buffering any potential problems with the loans. However, as with the full year result, I am going to add back in the intangible assets of $71.365m. These intangible assets represent (amongst other things) money spent on the latest up to date computer systems and premiums paid for successful business acquisitions in the past. IMO these premiums could be remonetised into cash if required.

$580.555m + $71.365m = $651.920m > $643.14m

Result: PASS TEST

But the demand for new capital to 'feed the Heartland hunger' looks set to continue into the future.

SNOOPY

[Snoopy]

Nevertheless, if the total 'tier capital' is added together - which comes to $580.555m - it is still below my "17% of loan" target no matter what the tier classification of capital buffering any potential problems with the loans. However, as with the full year result, I am going to add back in the intangible assets of $71.365m. These intangible assets represent (amongst other things) money spent on the latest up to date computer systems and premiums paid for successful business acquisitions in the past. IMO these premiums could be remonetised into cash if required.

$580.555m + $71.365m = $651.920m > $643.14m

Result: PASS TEST


I am deviating from what is normal accounting practice by recognising intangible assets as part of Heartland's 'backing security'. I am sure there will be some (like trained accountants) who will disagree with this approach. Yet in the case of Heartland, I feel that leaving out all the intangible assets as 'unrealisable' is too harsh. As a start I would like to remind shareholders where all their goodwill, and the rest of the intangible assets, came from.



Financial YearNet Carrying Amount of Computer Software {A}Net Carrying Amount of Acquisition Goodwill {B}Total Intangible Assets {A}+{B}Major Acquisition(s) Incrementing Goodwill


2011$1.415m$20.187m$21.602mSouthern Cross Building Society, CBS Canterbury and Marac


2012$2.710m$20.287m$22.997m


2013$2.844m$20.159m$23.003m


2014$2.278m$45.143m$47.421mAustralian Seniors Finance


2015$5.976m$45.143m$51.119m


2016$12.612m$45.143m$57.755m


2017$26.094m$45.143m$72.237m



More and more of the intangible assets (36% at EOFY2017) have come from computer software.

SNOOPY

[Snoopy]

More and more of the intangible assets (36% at EOFY2017) have come from computer software.


I think it likely that if Heartland fell over tomorrow, then the $26.074m of software assets on the books would have little value to a rescuing organization. The rescuer would no doubt have their own computer systems not compatible with what Heartland was doing. Thus would begin the long process of migrating Heartland's computer image of their own business on to the acquisitors computer platform. The legacy Heartland software would be left worthless. But this apparently sound argument in favour of not counting Heartland's software on the books as equity that could be monetised in an emergency has one key flaw.

"If Heartland fell over tomorrow" is the clue phrase. The very purpose of having a bang up to date computer system is to keep tab on the loan portfolio to make sure Heartland doesn't fall over. The superficial accountant might see a present value of $26.094m for software on the books and think:

"$26.094m is a lot of money. If Heartland had not spent the money and updated their software, there would be $26.094m more money available for creditors if things went bad. So from an accounting perspective, it would be best if Heartland saved money and didn't update their software."

The problem with this approach is that not spending the money updating software might contribute to accelerating a potential demise of Heartland. It would be a false economy to not understand what is going on inside the Heartland business. Thus my argument is that although the value of the software on the books is probably not recoverable, not including it as a 'backing asset' sends the wrong signal to potential investors. The Banking business is an 'information game'. IMO a Heartland with a bang up to date software system that is working well is the better bet than a Heartland that has not made that software investment. By recognising the software as an asset that should be counted, we investors can make better comparative investment decision as to whether Heartland is a good investment or not.

SNOOPY

[davflaws]

Kia ora Snoopy
I both understood and appreciated this post. Thank you.

[Snoopy]

I am deviating from what is normal accounting practice by recognising intangible assets as part of Heartland's 'backing security'. I am sure there will be some (like trained accountants) who will disagree with this approach. Yet in the case of Heartland, I feel that leaving out all the intangible assets as 'unrealisable' is too harsh. As a start I would like to remind shareholders where all their goodwill, and the rest of the intangible assets, came from.



Financial YearNet Carrying Amount of Computer Software {A}Net Carrying Amount of Acquisition Goodwill {B}Total Intangible Assets {A}+{B}Major Acquisition(s) Incrementing Goodwill


2011$1.415m$20.187m$21.602mSouthern Cross Building Society, CBS Canterbury and Marac




I now want to take investors right back to the formation of Heartland and the goodwill that came onto the books as a result. The following is a quote from p12 of AR2012 page 54, immediately following the acquisition of Southern Cross Building Society, CBS Canterbury and Marac on 5th January 2011 (during FY2011).

--------

"Goodwill of $20.1 million has not been allocated to individual cash generating units, as the future economic benefit is attributable to all business units. The Group's management and board continue to monitor goodwill at a total level."

"Goodwill on acquisition of $20.1 million has arisen due to expected benefits of the newly formed financial services group. The Society has the benefits of scale and scope and is expected to be value enhancing for all shareholders and offers a better outcome than could be expected as standalone entities."

--------

At the end of FY2012 (the first full financial year after which Heartland acquired the three companies mentioned), the profit before income tax was $20.329m. That would have adjusted downwards to an operational net profit after tax of $20.329m x 0.72 = $14.637m (if Heartland had not had a tax refund that year).

Fast forward to the end of FY2017 (the last financial year to be reported on before the 'Camereon Partners Scheme Booklet' was published) and the Reverse Mortgage business amounted to $921m, almost exactly half of the 'household' loan book. Of that $516m was Australian Reverse Mortages and $405m was NZ Reverse Mortgages (from p11&12 Annual Result 2017 presentation).

$60.808m-0.72($0.628m) = $60.355m is my estimate of the normalised NPAT for Heartland over FY2017. We can do a quick and dirty and not so accurate estimation of the amount of profit generated via the whole of Heartland less the Australasian Reverse mortgage business by simply allocating profit in proportion to the size of the respective loan book. The total receivables at EOFY 2017 were $3.545.897m.

So $60.355m x [($3,546m - $921m)/$3,546m] = $45.419m

The question as an investor you should ask is: Has the realisation of combining the three founding acquisitions (Southern Cross Building Society, CBS Canterbury and Marac) -together with PGW Finance, which incredibly was able to be brought into the Heartland fold without any related goodwill being acquired- lived up to that early promise? At this point I could attempt some fancy calculation to prove this point, one way or the other. But comparing the profit of five years previously ($14.637m) to the same businesses units after five years of Heartland stewardship ($45.419m), tells you all you need to know. And the answer is "Hell yes".

The next question to ask youself is this. If all of the business, less home equity loans, was sold off to a third party now, would that $20.1 million of goodwill at acquisition time be recovered? My answer: "Hell yes, and then some". This then is the key point of this post. That $20.1m of intangible goodwill is bankable any time Heartland management so chooses. So it should be regarded as a 'hard asset' of the company, just as good as a 'net tangible asset' in my view.

SNOOPY

[Snoopy]

Financial YearNet Carrying Amount of Computer Software {A}Net Carrying Amount of Acquisition Goodwill {B}Total Intangible Assets {A}+{B}Major Acquisition(s) Incrementing Goodwill


2014$2.278m$45.143m$47.421mAustralian Seniors Finance





I now wish to look at the goodwill acquired as a result of the Seniors acquisition.

From p64 of AR2014 we learn that $25m in goodwill has come onto the books as a result of the REL business being acquired.

--------

Goodwill

Goodwill on acquisition of $25.0 million has arisen due to expected benefits of the newly acquired business. NSL is the largest HER mortgage provider in New Zealand, with approximately 80% market share. ASF is the largest non-bank HER mortgage provider in Australia, with approximately 20% of that market. Both the NSL and ASF portfolios are seasoned and diversified. This acquisition has given the Group the opportunity to fast-track entry into strong and established market positions.

The Group incurred acquisition-related costs of $1.2 million in the year to 30 June 2014 relating to external legal fees and due diligence costs. These costs are included in selling and administration expenses.
In the 3 months to 30 June 2014, NSL and ASF contributed net operating income of $2.5 million and estimated profit of $1.2 million.

---------

Annualizing that after tax profit means a NPAT of $4.8m for the FY2014 year. Fast forward three years and the annual net profit for this business unit can be estimated as:

So $60.355m x [$921m/$3,546m] = $15.676m

So we ask the relevant question. If Heartland were prepared to pay $25m in a goodwill payment three years previously and the profit for the business unit has since tripled, what chance do Heartland have of getting that $25m of goodwill back in hard cash, if they chose to sell? I think they would easily get it back. My conclusion is similar to Part 3. The $25m in 'Seniors goodwill' should be regarded as a 'hard asset' of the company, just as good as any 'net tangible asset' in my view.

SNOOPY

[winner69]

Snoops ....back when Seniors was acquired and $25m of goodwill was created there were a few on this forum who suggested that Heartland had paid too much .....by paying $25m more than the assets they acquired.

Been a good acquisition hasn’t it?

[percy]

Snoops ....back when Seniors was acquired and $25m of goodwill was created there were a few on this forum who suggested that Heartland had paid too much .....by paying $25m more than the assets they acquired.

Been a good acquisition hasn’t it?

Fantastic acquisition.
What goodwill would Heartland receive if they sold Seniors?
1] Less than they paid.
2] The same as they paid.
3] A little more than they paid.
4] Ten times what they paid.
5] More than ten times.

[iceman]

Percy depends on when they’d sell it. If it was in a couple of years for example , I think your answer 5) would definitely apply.

Heartland over the years has been criticised on this forum for both paying too much for acquisitions and being too conservative. Probably means they’ve got it about right.

With Seniors, they got a bargain

[Snoopy]

The 'Meads Test' is way to find out if dear old Colin says a profitable finance company is 'solid as', whether that company will run out of cash when it comes time to repay your debenture. "Liquidity Buffer Ratio" sounds a bit pompous, so I have adopted the term 'Meads Test'. I think most investors will relate to that term better.

We are looking at the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding) > 10%

Heartland provides a nice projection of forward cashflows in note 14 of IRFY2017. But these are contracted cashflows. In practice depositors roll over their Heartland debentures. And when customers repay a Heartland loan, they often take out another loan. So what we as investors need to concentrate on is the expected behaviour of those that take out loans from Heartland and those that loan money to Heartland. Expected behaviour is not written in stone. But we can make an educated guess at this by looking at what happened in prior periods where both 'contracted' behaviour and 'expected' behaviour were tabulated. "Adjustment factors" in the table below:



HY2017 Loan Maturity (Financial Receivables)ContractedCE FactorExpected


On Demand$69.655m1.000$69.655m


0-6 months$802.074m1.32$1,058.738m


6-12 months$538.448m1.32$710.751m





HY2017 Deposit Maturity (Financial Liabilites)ContractedCE FactorExpected


On Demand$754.583m0.0301$22.713m


0-6 months$1,047.186m0.324$339.288m


6-12 months$889.191m0.364$323.666m



Now I have generated the expected cashflow data over the ensuing twelve months, I can proceeed to make some 'Meads Test' calculations.


The 'Meads Test' is way to find out if the late dear old Colin said a profitable finance company was 'solid as', whether that company would likely run out of cash when it came time to repay your debenture. "Liquidity Buffer Ratio" sounds a bit pompous, so I have adopted the term 'Meads Test'. I think most investors will relate to that term better.

We are looking at the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding) > 10%

Heartland provides a nice projection of forward cashflows in note 14 of IRFY2017. But these are contracted cashflows. In practice depositors roll over their Heartland debentures. And when customers repay a Heartland loan, they often take out another loan. So what we as investors need to concentrate on is the expected behaviour of those that take out loans from Heartland and those that loan money to Heartland. Expected behaviour is not written in stone. But we can make an educated guess at this by looking at what happened in prior periods where both 'contracted' behaviour and 'expected' behaviour were tabulated. "Adjustment factors" in the table below:



HY2017 Loan Maturity (Financial Receivables)ContractedCE FactorExpected


On Demand$117.316m1.000$117.316m


0-6 months$856.795m1.32$1,130.969m


6-12 months$497.296m1.32$656.431m





HY2017 Deposit Maturity (Financial Liabilites)ContractedCE FactorExpected


On Demand$852.165m0.0301$25.650m


0-6 months$1,272.889m0.324$412.416m


6-12 months$614.591m0.364$223.711m



Now I have generated the expected cashflow data over the ensuing twelve months, I can proceeed to make some 'Meads Test' calculations.

SNOOPY

[Snoopy]

HNZ LENDINGS vs HNZ DEBENTURES

Customers owe HNZ 'Finance Receivables' (Lendings) of $3,334,800,000. If we look at note 14 of IFR2017, we can derive the expected maturity profile of total finance receivables due over the next twelve months. (This is what I did in part 1 of this calculation.) Adding the totals for the ensuing twelve months gives:



On Demand0-6 Months6-12 MonthsTotal


Expected Receivables Due$69.655m + $1,058.738m + $710.751m = $1,839.144m


less Expected Deposits for Repayment$22.713m + $339.288m + $323.666m = $685.667m


equals Net Expected Cash Into Business$46.942m$719.450m$387.085m$1,153.477m {B}



If more money is expected coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for liquidity and debenture holders being repaid. That is the case here: good news for debenture holders.

It is important to note that this calculation is based on the loan book position at balance date. New loans taken out since balance date are not included. Neither are brand new customer debentures invested with Heartland since balance date. So these figures are not a forecast of what will happen. But they are are forecast of what will happen if all customer loan and deposit activity ceased at last balance date. This means the figures are best suited for comparing with previous periods, rather than being forecasts of what will happen in their own right.

Compared to six months ago, the expected liquidity imbalance has improved overall. But the 0-6 month period has blown out, signalling a possible 'wall of cash' to be returned to Heartland between December 2016 and June 2017.


HNZ LENDINGS vs HNZ DEBENTURES

Customers owe HNZ 'Finance Receivables' (Lendings) of $3,783,091,000. If we look at note 14 of IFR2018, we can derive the expected maturity profile of total finance receivables due over the next twelve months. (This is what I did in part 1 of this calculation.) Adding the totals for the ensuing twelve months gives:



On Demand0-6 Months6-12 MonthsTotal


Expected Receivables Due$117.316m + $1,130.969m + $656.431m = $1,904.716m


less Expected Deposits for Repayment$25.650m + $412.416m + $223.711m = $661.777m


equals Net Expected Cash Into Business$91.666m$718.553m$432.730m$1,242.939m {B}



If more money is expected coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for liquidity and debenture holders being repaid. That is the case here: good news for debenture holders.

It is important to note that this calculation is based on the loan book position at balance date. New loans taken out since balance date are not included. Neither are brand new customer debentures invested with Heartland since balance date. So these figures are not a forecast of what will happen. But they are are forecast of what will happen if all customer loan and deposit activity ceased at last balance date. This means the figures are best suited for comparing with previous periods, rather than being forecasts of what will happen in their own right.

Compared to six months ago, (net $884.340m due from FY2017 balance date) ) the expected liquidity imbalance has improved overall. Compared the pcp the expected cash to be returned has grown roughly in line with the loan book. This could indicate a 'seasonal effect' of net loan maturity, where more cash will become due in the ensuing twelve months when measuring from the December balance date.

SNOOPY

[Snoopy]

(Total Current Money to Draw On)/(Net Current Loans Outstanding) > 10%

In the numerator of the equation, we have borrowings.

HNZ BORROWINGS



1/ Term deposits lodged with Heartland.$2,512.629m


2/ Bank Borrowings$454.317m


3/ Securitized Borrowings total$276.696m


4/ Subordinated Bonds$3.379m


Total Borrowings of (see note 7, IRFY2017)$3,247.021m



Note 7 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.

Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are in relation to the reverse mortgage portfolio. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes. Heartland can’t rely on CBA Australia as a source of short-term funds.

The information given in note 7 on the securitized borrowing facilities is as follows:

-------



Total HY2017Total FY2016Facility Maturity Date HY2017


Securitized bank facilities total all in relation to the Heartland ABCP Trust 1 $350.000m $350.000m3rd August 2017 (*)


less Current level of drawings against this facility$276.696m$284.429m


equals Borrowing Headroom$73.304m {A}$65.571m



(*) I do not expect any problem in rolling this facility over for another year.

-------

Summing up:

(Total Current Money to Draw On)/(Expected Current Net Loan Maturity Outstanding)
= {A}/{B (from post Liquidity Buffer Ratio HY2017 (Part 2) }
= $73.304m / $1,153.477m
= 6.4% < 10%

=> Fail Short term liquidity test




HY2017FY2016


Amount lent to Customers (Receivables)$3,334.800m (+7.1%)$3,113.957m


Total Borrowings$3,247.021m (+8.2%)$2,999.987m


Amount borrowed from Customers (Debentures and Deposits)$2,512.679m (+10.1%)$2,282.876m



a/ Securitized borrowing facilities are $7.773m lower over the six month comparative period.
b/ External Bank borrowings have increased by $25.013m.
c/ $20m has been raised in part one of a cash issue.

Heartland have reduced their current period liquidity risk profile by:

1/ Increasing the debentures and parent bank borrowings at a faster rate than the receivables.
2/ Increasing the borrowed funds from Heartland bank customers, at a faster rate than the increase of all borrowings.


(Total Current Money to Draw On)/(Net Current Loans Outstanding) > 10%

In the numerator of the equation, we have borrowings.

HNZ BORROWINGS



1/ Term deposits lodged with Heartland.$2,703.234m


2/ Bank Borrowings$637.572m


3/ Securitized Borrowings total$115.059m


4/ Subordinated Bonds$3.379m


5/ Subordinated Notes$22.277m


6/ Unsubordinated Notes$151.902m


Total Borrowings of (see note 7, IRFY2018)$3,633.423m



Note 7 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.

Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are in relation to the reverse mortgage portfolio. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes. Heartland can’t rely on CBA Australia as a source of short-term funds.

The information given in note 7 on the securitized borrowing facilities is as follows:

-------



Total HY2018Total FY2017Facility Maturity Date HY2018


Securitized bank facilities total all in relation to the Heartland ABCP Trust 1 $175.000m $300.000m28th February 2018 (*)


less Current level of drawings against this facility$115.059m$214.365m


equals Borrowing Headroom$59.941m {A}$85.635m



(*) I do not expect any problem in rolling this facility over for another year.

-------

Summing up:

(Total Current Money to Draw On)/(Expected Current Net Loan Maturity Outstanding)
= {A}/{B (from post Liquidity Buffer Ratio HY2018 (Part 2) }
= $59.941m / $1,242.939m
= 4.8% < 10%

=> Fail Short term liquidity test




HY2018FY2017


Amount lent to Customers (Receivables)$3,783.091m (+6.7%)$3,545.897m


Total Borrowings$3,683.423m (+7.6%)$3,421.749m


Amount borrowed from Customers (Debentures and Deposits)$2,703.234m (+5.0%)$2,573.980m



a/ Securitized borrowing facilities utilized are $99.306m lower over the six month comparative period.
b/ External Bank borrowings have increased by $20.734m over the six month comparative period.
c/ $59.225m m has been raised in part one of a pro rata rights offer.

Heartland have reduced their current period liquidity risk profile by raising yet more new capital via the rights issue. The total borrowings (from the parent banks and short term debenture holders combined) have increased by 6.6%, closely matching the rise in short term receivables of 6.7%. The increase in equity was timely, because it looks like short term expected liquidity (from existing borrowing and lending arrangements) has dropped to an all time low.

SNOOPY

[Snoopy]

Nevertheless, if the total 'tier capital' is added together - which comes to $580.555m - it is still below my "17% of loan" target no matter what the tier classification of capital buffering any potential problems with the loans. However, as with the full year result, I am going to add back in the intangible assets of $71.365m. These intangible assets represent (amongst other things) money spent on the latest up to date computer systems and premiums paid for successful business acquisitions in the past. IMO these premiums could be remonetised into cash if required.

$580.555m + $71.365m = $651.920m > $643.14m

Result: PASS TEST




Summing up:

(Total Current Money to Draw On)/(Expected Current Net Loan Maturity Outstanding)
= {A}/{B (from post Liquidity Buffer Ratio HY2018 (Part 2) }
= $59.941m / $1,242.939m
= 4.8% < 10%

=> Fail Short term liquidity test

Heartland have reduced their current period liquidity risk profile by raising yet more new capital via the rights issue. The total borrowings (from the parent banks and short term debenture holders combined) have increased by 6.6%, closely matching the rise in short term receivables of 6.7%. The increase in equity was timely, because it looks like short term expected liquidity (from existing borrowing and lending arrangements) has dropped to an all time low.


Some of you may be wondering why I am so concerned with Heartland's half year results to 31st December 2017, when the full year results to 30th June 2018 have already been released. The answer is that these were the last full results available when the "Independent Adviser’s Report Prepared in Relation to the Proposed Restructure of Heartland Bank Limited" was commissioned. Actually a partial set of more up to date accounts (p36 of the Independent advisors report) dated 31st March 2018 was handed over by management. However the information released was just a balance sheet. It contained insufficient information to allow the fuller analysis that the more comprehensive half year results allowed. I also noted that the 31st March 2018 capital position was not sufficiently different from the 31st December 2017 capital position to cause my conclusions to be revised.

The two posts quoted above sum up the divergent prospects of Heartland's capital and cash position. On the one hand, there seems to be sufficient capital within Heartland to support a loan book of the current size. On the other hand, the buffer of cash available to pay out debenture holders could be questionable in a downturn. My calculations show that Heartland has access to only half of the cash buffer they might reasonably expect to need. Of course, if I include the cash supplied as part of the pro-rata rights issue which coudl be assumed to be as yet unallocated then the picture changes:

(Total Current Money to Draw On)/(Expected Current Net Loan Maturity Outstanding)
= ($59.225m + $59.941m) / $1,242.939m
= 9.6% < 10% but within the realms of rounding close enough to 10% for it not to matter.

Heartland will have no problem with cashflows, providing they continue to maintain the support of their shareholders, who have added nearly $100m in new capital to the balance sheet just from rights issues over the last two years. The other option of getting more cash in from new debenture holders may not be possible in the climate of an economic downturn. If Heartland can raise wholesale debt funding in Australia to fund the REL portfolio 'over there', that will all help too. But what happens if capital markets suddenly become more difficult? Can Heartland guarantee that they will be able to fund their growing REL portfolio in Australia with shorter term wholesale funding? IMO there are significant near term cashflow risks on the horizon for Heartland. If I were a shareholdler I would be comforted by the Reserve Bank of New Zealand oversight of 'Heartland Bank'. But with those potentially cashflow problematic loans planned to move outside of the Heartland bank structure, the oversight of some of the most vulnerable loans will be lost.

Heartland can double the size of their Australian operation 'right now' without going outside RBNZ guidelines (33% of Heartlands business is allowed to be 'overseas'), without growing the NZ loan book. It seems to me that given this, the proposed restructure is premature. If I was a shareholder, and given the turbulent political times that are upcoming in Australia, I would feel much happier if the RBNZ kept the reins on the whole Heartland operation a bit longer. My recommendation for Heartland shareholders is that they should REJECT the Heartland restructuring proposal. Maybe in a couple of years revisit this proposed restructuring. But I think very little opportunity will go begging between then and now. It looks to me to be precisely the wrong time to take away that RBNZ oversight of the Australian operations. Don't do it!

SNOOPY

[Snoopy]

Under Note 4 of HY2017 the 'impaired asset expense' has increased to $6.892m (HY2017, ended 31st December 2016) up from from $5.610m in the corresponding prior period (HY2016). Bad debts for the full year to 30th June 2016 (FY2016) added to $13.501m. By simple subtraction the bad debt expense for the period 1st January 2016 to 30th June 2016 ( 2HY2016 ) was

$13.501m - $6.892m = $6.609m.

This means that what we are seeing is a 4.3% rise in bad debts expense declared over the six months to December 2016, compared to the immediately preceeding 6 month period.


Under Note 4 of HYR2018 the 'impaired asset expense' has increased to $10.416m (HY2018, ended 31st December 2017) up from from $6.892m in the corresponding prior period (HY2017). Bad debts for the full year to 30th June 2016 (FY2017) added to $15.015m. By simple subtraction the bad debt expense for the period 1st January 2017 to 30th June 2017 ( 2HY2017 ) was

$15.015m - $6.892m = $8.123m.

This means that what we are seeing is a 28% rise in bad debts expense declared over the six months to December 2017, compared to the immediately preceeding 6 month period.

SNOOPY

[Beagle]

Spotted on the weekend....Average broker target price 12 months hence is $1.69...ouch !

[winner69]

Spotted on the weekend....Average broker target price 12 months hence is $1.69...ouch !

That implies they value it at 145/150 today

Bonkers

[couta1]

Spotted on the weekend....Average broker target price 12 months hence is $1.69...ouch ! Mate, you should know by now not to take any notice of analysts target prices, back to the kennel for the rest of the day as punishment.

[Snoopy]

Winner is referring to one aspect of 'the art of profit manipulation', which is one way to interpret the table in my post 9372.

Put succinctly Column 'V' is the 'Impaired Asset Provision' going into the problem loan bucket. Column 'W' is the 'Impaired Asset Expense' leaking out of the problem loan bucket. In any particular six monthly period, there is no reason these two should be exactly the same. Over time though, one might expect the 'Impaired Asset Provision' to 'fully feed' the 'Impaired Asset Expense'. If it didn't, then the impaired assets on the books would eventually disappear. And it is unrealistic to think that a bank would have no impaired assets on the books at all.

"1st April 2014: Seniors 'Reverse Mortgage' Business Acquired." This is the date I recognise as the birth of the 'modern' Heartland we see today. It is probably unfair to compare the 'modern' Heartland with the Heartland that was born with all sorts of legacy property portfolio issues. So I have cut down my table to just show the half year time periods from 1st July 2014 onwards (HY2015 onwards).



Date'Stressed' Loans on the books (X)
Net Financial Receivables (Impairments deducted) (Y)
(X)/(Y) Impaired Asset Expense (V)Write Off (W)
Gross Financial Receivables (Z)
(V)/(Z)
(W)/(Z)


EOHY2015$33.469m$2,722.433m1.23%$5.102m$1.456m$2,7 49.232m0.19%0.05%


EO2HY2015$32.824m$2,862.070m1.15%$7.003m$2.119m$2, 893.724m0.24%0.07%


EOHY2016$29.147m$2,928.601m1.00%$5.610m$14.282m$2, 951.075m0.19%0.48%


EO2HY2016$32.864m$3,113.957m1.06%$7.891m$4.381m$3, 140.105m0.25%0.14%


EOHY2017$33.050m$3,334.800m0.99%$6.892m$6.552m$3,3 61.934m0.21%0.19%


Total$32.498m$28.790m


Average0.22%0.19%



This shows a better picture with 'V' and 'W' more in balance. There is still a solid trend for X (the Stressed Loans of the Books) coming down. But this could be because we have a particularly favourable market for borrowers at the moment. Could it be that there are genuinely less stressed loans out there? Does that mean that my complaining about the divergence between the trends of 'Stressed Loans' and 'Impairment Provisions' over time is merely a product of benign market conditions? So there is nothing to worry about?


Column 'V' is the 'Impaired Asset Provision' going into the problem loan bucket. Column 'W' is the 'Impaired Asset Expense' (the actual annual write off) leaking out of the problem loan bucket. In any particular six monthly period, there is no reason these two should be exactly the same. Over time though, one might expect the 'Impaired Asset Provision' to 'fully feed' the 'Impaired Asset Expense'. If it didn't, then the impaired assets on the books would eventually disappear. And it is unrealistic to think that a bank would have no impaired assets on the books at all.

"1st April 2014: Seniors 'Reverse Mortgage' Business Acquired." This is the date I recognise as the birth of the 'modern' Heartland we see today. It is probably unfair to compare the 'modern' Heartland with the Heartland that was born with all sorts of legacy property portfolio issues. So my table just shows the half year time periods from 1st July 2014 onwards (HY2015 onwards).

Heartland in their breakdown of the 'Asset Quality of Financial Receivables' list the following three mutually exclusive problem loan categories.

a/ Loans at least 90 days past due.
b/ Loans individually impaired.
c/ Restructured assets. (this category of loan seems to have been dropped from AR2017 onwards)

These loans are partially written off, the amount of the write off being accounted for in the 'Provision for Impairment' (a separate listing category, d/).

My definition of a 'stressed loan' total can be calculated as follows:

'Stressed Loan Total' = (a)+(b)+(c)-(d)

Note that this definition of a 'stressed loan' specificxally excludes that part of any loan that has already been impaired.



Date'Stressed' Loans on the books (X)
Net Financial Receivables (Impairments deducted) (Y)
(X)/(Y) Impaired Asset Expense (V)Write Off (W)
Gross Financial Receivables (Z)
(V)/(Z)
(W)/(Z)


EOHY2015$33.469m$2,722.433m1.23%$5.102m$1.456m$2,7 49.232m0.19%0.05%


EO2HY2015$32.824m$2,862.070m1.15%$7.003m$2.119m$2, 893.724m0.24%0.07%


EOHY2016$29.147m$2,928.601m1.00%$5.610m$14.282m$2, 951.075m0.19%0.48%


EO2HY2016$32.864m$3,113.957m1.06%$7.891m$4.381m$3, 140.105m0.25%0.14%


EOHY2017$33.050m$3,334.800m0.99%$6.892m$6.552m$3,3 61.934m0.21%0.19%


EO2HY2017$38.341m$3,545.897m1.08%$8.123m$5.119m$3, 575.633m0.23%0.14%


EOHY2018$44.455m$3,783.091m1.18%$10.416m$8.082m$3, 814.979m0.27%0.21%


Total$51.037m$41.991m


Average0.23%0.18%



I work on the assumption that a 'stressed loan' can be indentified before any portion of that loan becomes impaired. Certainly if this wasn't true, it would show pretty poor debtor managment by Heartland!

In contrast to the pcp review, the 'stressed loans' look to have come up again to historical levels. This is comforting. It means that Heartland look to be back on top of indentifying their stressed loans. My previous somewhat dubious hypothesis -that the loan portfolio was becoming inherently 'less stressed' - can now be discarded. The fact that the stressed loans have gone up again in percentage terms is a good thing, becasue it means that Heartland are casting a more watchful eye on their loan book.

The changes to the 'provision for impaired loans' (impaired asset expense), as summed over the last seven half year reporting periods now exceeds the actual 'write offs' over the same period by 22% (up from 13% from the pcp). This is good becasue it means that Heartland are being more conservative with their impaired loan provisioning. 'Book fiddling', with unrecoverable loans being held on the books that in turn falsely exaggerate profitability does not seem to be happening.

I can't see anything to worry about here in the Heartland impaired loan department.

SNOOPY

[Beagle]

That implies they value it at 145/150 today

Bonkers

https://www.marketscreener.com/HEARTLAND-BANK-LTD-11344518/financials/

Something not quite right. FY18 earnings for a start aren't right, eps is 12.5 approx. not the 13 shown here and using the mid point of the companies own forecast I get 13.5 cps earnings next year.
I really like the way the home equity release loan book is growing and I think there's a good chance we will see 7-8% eps growth this year, (unless they issue lots more shares).

[percy]

Mate, you should know by now not to take any notice of analysts target prices, back to the kennel for the rest of the day as punishment.

Love it,ha ha ha.!!…….lol.

[Beagle]

Mate, you should know by now not to take any notice of analysts target prices, back to the kennel for the rest of the day as punishment.

LOL unless they agree with your own prognosis eh mate :)

[couta1]

LOL unless they agree with your own prognosis eh mate :) I'm always weary because they are return trip ticket clippers.

[winner69]

Appears as if guru analysts just follow the market price anyway

Market goes down ....their targets go down and vice versa


Makes you wonder what their financial models say. Hard to see them tweaking them as much as their downgrades show .....Heartland must be one of the most consistent performing financially stocks there is


Suppose they cheat and just guess a PE thing think appropriate.

[percy]

We must remember analysts are only "the paid help".
They are not investors, and have no "skin in the game,"so their views lack conviction...……………...lol.

[Beagle]

We must remember analysts are only "the paid help".
They are not investors, and have no "skin in the game,"so their views lack conviction...……………...lol.

$2.50 any day now eh Percy :p

[percy]

Counting down to the 21st September.....About 25 days to go,or just 3 weeks this Friday..
5.11% net yield and increasing yearly,means I remain "well positioned."
10cps fully imputed divie is my next milestone
$2.50,then $3.00 all will be passed at some stage, on the way to $5.00......lol.

[winner69]

Counting down to the 21st September.....About 25 days to go,or just 3 weeks this Friday..
5.11% net yield andincreasing yearly,means I remain "well positioned."
10cps fully imputed divie is my next milestone
$2.50,then $3.00 all will be passed at some stage, on the way to $5.00......lol.

No payrise this year ...hmm

[percy]

No payrise this year ...hmm

Make us appreciate next interim divie increase [when they announce it] more.!..lol.

[Marilyn Munroe]

The Australian Securities and Investments Commission have warned Heartland Seniors Finance among others offering reverse mortgages to not be bastards towards elderly underarm bowlers.

https://www.smh.com.au/business/banking-and-finance/tick-box-exercise-banks-not-highlighting-risks-of-reverse-mortgages-warns-asic-20180828-p5007y.html

Boop boop de do
Marilyn

[percy]

The Australian Securities and Investments Commission have warned Heartland Seniors Finance among others offering reverse mortgages to not be bastards towards elderly underarm bowlers.

https://www.smh.com.au/business/banking-and-finance/tick-box-exercise-banks-not-highlighting-risks-of-reverse-mortgages-warns-asic-20180828-p5007y.html

Boop boop de do
Marilyn

As we know Heartland's RELs in NZ have the backing of Consumer NZ.So no "bastards" or "underarm bowlers" in the team,which will position them well with Australian regulators.Most probably set the standard.
The Australian Government is letting retirees take out RELs,with the draw down being added to their weekly pension payments.So they are promoting RELs,but with no lump sum draw downs.This will add awareness to retirees of RELs, and will see the whole market for RELs grow substantially.
HBL Seniors, and other providers of RELs, offer lump sum draw downs,so I expect the market will expand for them.

[ziggy415]

As we know Heartland's RELs in NZ have the backing of Consumer NZ.So no "bastards" or "underarm bowlers" in the team,which will position them well with Australian regulators.Most probably set the standard.
The Australian Government is letting retirees take out RELs,with the draw down being added to their weekly pension payments.So they are promoting RELs,but with no lump sum draw downs.This will add awareness to retirees of RELs, and will see the whole market for RELs grow substantially.
HBL Seniors, and other providers of RELs, offer lump sum draw downs,so I expect the market will expand for them.

I wonder what westpack and macquarry will do with their old rel,s now that there not taking on any new ones...probably looking for someone to buy them off them......hmmmm....wonder who

[percy]

May help to explain why Heartland are moving to their new structure so quickly.

[Beagle]

Quite surprised the REL business is so small compared to normal home loans. MASSIVE scope for growth in the years ahead I reckon.
Saw an interesting survey yesterday that claimed one third of American's had less than $5K saved for retirement and the average was only $84K and that's including their tax efficient 401K savings programs. Probably similar figures in Australia with plenty of baby boomers looking to tap into the equity in their houses to maintain a reasonable lifestyle in retirement.

Had another look at the look through the near term dividend and what's the yield investment case going forward today.
$1.74 less 5.5 cents back shortly = $1.685 invested on an FY19 investment case basis.
Assume some growth in divvy this year, surely they won't be so mean as to keep it the same again, say 9.5 cps this year fully imputed as always.
9.5 / 0.72 = 13.1944 cps gross / 168.5 = 7.83% gross yield.

Key point of difference with this one as compared to some other yield investment cases is their ability to steadily grow the dividend over time. Pretty solid investment case on a yield basis with low interest rtaes forecast for the foreseeable future. Trading in line with its peer group on a PE basis.

[percy]

Possibly "Fake News" but I hear a good number of people reach 65 with a mortgage on their home,while the lucky ones have repaid it.
It also appears the average amount people have invested in the share market is about $30,000.
These are "well off" people.
A huge amount of people need to work well past retirement age,
Yes REL business is small fry compared to usual house mortgages.
Yes I agree there is MASSIVE scoop for growth in the years ahead for RELs.
Australia and NZ have seen,and are seeing people living in 500,000 to $1.5mil homes without the income to afford any standard of living, after paying rates,insurance and power.
RELs give them a live.Freedom to stay in their home ,and enjoy some of their capital,which after all is theirs' to do with whatever they want to.Travel,home improvements,medical procedure,grand daughter's university fees,or even heat the old house to a liveable temperature.
It is in governments interests to keep old people in their own home, and that is why governments support RELs.

[tim23]

[QUOTE=percy;727114]Possibly "Fake News" but I hear a good number of people reach 65 with a mortgage on their home,while the lucky ones have repaid it.
It also appears the average amount people have invested in the share market is about $30,000.
These are "well off" people.
A huge amount of people need to work well past retirement age,
Yes REL business is small fry compared to usual house mortgages.
Yes I agree there is MASSIVE scoop for growth in the years ahead for RELs.
Australia and NZ have seen,and are seeing people living in 500,000 to $1.5mil homes without the income to afford any standard of living, after paying rates,insurance and power.
RELs give them a live.Freedom to stay in their home ,and enjoy some of their capital,which after all is theirs' to do with whatever they want to.Travel,home improvements,medical procedure,grand daughter's university fees,or even heat the old house to a liveable temperature.
It is in governments interests to keep old people in their own home, and that is why governments support RELs.[/QUOTEG
Good post I think RELs will become mainstream in a few years, I think this part of the business has huge potential.

[minimoke]

The old diversidy target not working too well for Labour at the moment. Two ministers down. Both women. Just goes to show women in power can be equally as incompetent as men. Hopefully corporations are taking this on board and reflecting that proven merit should be the sole criteria for any appointment.

[winner69]

Farmgate milk price down ...but Opportunity for Heartland as dairy farmers might need more working capital

[Beagle]

Farmgate milk price down ...but Opportunity for Heartland as dairy farmers might need more working capital
lol that's Beagle bait plain and simple

[percy]

I am looking forward to catching up with deputy CEO Chris Flood, and CFO David Mackrell,on Monday the 10th September,at Heartland's "Retail Investor Roadshow."
I appreciate these presentations.Always learn something.
Thanks in advance Heartland for taking the trouble.

[winner69]

I am looking forward to catching up with deputy CEO Chris Flood, and CFO David Mackrell,on Monday the 10th September,at Heartland's "Retail Investor Roadshow."
I appreciate these presentations.Always learn something.
Thanks in advance Heartland for taking the trouble.

Better read the book before you go

[winner69]

lol that's Beagle bait plain and simple

Better than minimoke baiting re diversity

At least he only referred to gender and kept race out of it

[Beagle]

Better than minimoke baiting re diversity

At least he only referred to gender and kept race out of itlol that was very wise.

[percy]

Better read the book before you go

Have done so,including foot notes a certain "legend" missed.!..lol.

[winner69]

Have done so,including foot notes a certain "legend" missed.!..lol.

Well done. Footnotes are the best bits

Might go to Wellington one even though Jeff only sending the boys ....snacks afterwards the invite says. If play cards right might get enough so don’t need dinner ...Heartland healping pensioners ..well done Heartland

[Beagle]

Wonder why I haven't got one of these invites...felling left out and :( Suppose the annual meeting being in Auckland might have something to do with it...or maybe they just invite those with a seven figure sized shareholding like Winner and Percy :D

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12116824 Honestly if farmers can't make money at that price its time to move on...

[minimoke]

Well done. Footnotes are the best bits

Might go to Wellington one even though Jeff only sending the boys ....snacks afterwards the invite says. If play cards right might get enough so don’t need dinner ...Heartland healping pensioners ..well done Heartland
I classify those snacks as an Special Dividend - and its incumbent on me to maximise my dividend especially as it its tax free.

[percy]

Well done. Footnotes are the best bits

Might go to Wellington one even though Jeff only sending the boys ....snacks afterwards the invite says. If play cards right might get enough so don’t need dinner ...Heartland healping pensioners ..well done Heartland

Yes you miss Jeff.Jeff does the diversity,the feel nice stuff you enjoy,while he leaves the meat to David,and Chris.
Don't over do the good quality wines,and under do the tucka. Pity the presentation is outside "Gold Card" bus hours.

[BlackPeter]

I classify those snacks as an Special Dividend - and its incumbent on me to maximise my dividend especially as it its tax free.

NO - don't! Lets hope nobody from IRD read your post - otherwise they might join the meetings, take records and charge withholding tax on the provided snacks ;) - I am sure they could classify them as fringe benefits;

However - there might be a loophole to rescue snack-taxed shareholders. I understand that HBL invited as well non shareholders (actually all NZSA members) to these meetings - i.e. the snacks are not a dividend but just a marketing investment and can be written off HBL's tax bill. :cool:

[percy]

Wonder why I haven't got one of these invites...felling left out and :( Suppose the annual meeting being in Auckland might have something to do with it...or maybe they just invite those with a seven figure sized shareholding like Winner and Percy :D

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12116824 Honestly if farmers can't make money at that price its time to move on...

Yes I would guess it is to do with the agm being held in Auckland.

[winner69]

Yes you miss Jeff.Jeff does the diversity,the feel nice stuff you enjoy,while he leaves the meat to David,and Chris.
Don't over do the good quality wines,and under do the tucka. Pity the presentation is outside "Gold Card" bus hours.

Coming home will be OK on the Gold Card ....if Wellington buses turn up

[Snoopy]

Have done so,including foot notes a certain "legend" missed.!..lol.


Yes and just to remind everyone what you found. There was a tiny foot note at the bottom of page 6:

"It is a condition of Heartland Bank’s registration as a registered bank that Heartland Bank must conduct a substantial portion of its business within New Zealand. This requires Heartland Bank’s Australian assets to not exceed 33% of its total assets."

Yet if you go over to the Cameron Partners Report p23, or p64 of the 'report within a report'.

Requirement for Substantial portion of business in New Zealand (Total Assets Maximum): Not disclosed

Why did Heartland not disclose to Camerons the maximum amount of business they could do outside of New Zealand, when they knew what it was all along? Could it be that if they had disclosed this, then Cameron's would have realised that they could more than double their business in Australia with the rules as they are now? And if Cameron's had known this, then the touted advantage of removing the 'constraint on Australian funding and asset growth' would probably not be a factor for several years of organic business growth?

Of course it might be that Heartland wants to acquire a substantial existing reverse mortgage portfolio from a third party to add to their existing operations. In that case the restructure would be understandable. But if this was the case, why doesn't Heartland tell you shareholders what is in the wind?

This proposal removes the protection of Reserve Bank of NZ oversight for no good reason. It will make no difference to Heartland profitability for the next couple of years at least if you vote in down. This new arrangement is an erosion of minority shareholder oversight and protection IMO. Vote it down folks.

SNOOPY

[percy]

If you had read the report from front to back,rather than back to front, you would have found it on page 6.[always read the notes]
We do not know why Camerons chose not to mention this.
Suggesting Heartland did not disclose this to them is just guess work.

[Snoopy]

If you had read the report from front to back,rather than back to front, you would have found it on page 6.[always read the notes]
We do not know why Camerons chose not to mention this.
Suggesting Heartland did not disclose this to them is just guess work.

Cameron's did disclose what they knew about the Heartland Financial Compliance Limits. It is in table 8, and 13 items were listed together with their limits. This presents a very complete picture of the constraints on Heartland. But the 14th item in that table (the amount of business that could have been done outside of NZ) was listed as 'not disclosed'. Heartland knew what it was, but it seems they didn't tell Camerons. They told them in great detail of the 13 other restrictions. But they did 'not disclose' the fourteenth restriction, seemingly by their own choosing. This is not guess work on my part. You have to ask yourself why?

The quote below is a liner from Cameron's 'Table 8'

Requirement for Substantial portion of business in New Zealand (Total Assets Maximum): Not disclosed

Just to be clear, I am not saying that the information wasn't disclosed. I am saying that Cameron's are telling shareholders the information wasn't disclosed, presumably because they weren't given it by Heartland. There is a big difference between those two statements!

SNOOPY

[bull....]

Cameron's did disclose what they knew about the Heartland Financial Compliance Limits. It is in table 8, and 13 items were listed together with their limits. This presents a very complete picture of the constraints on Heartland. But the 14th item in that table (the amount of business that could have been done outside of NZ) was listed as 'not disclosed'. Heartland knew what it was, but it seems they didn't tell Camerons. They told them in great detail of the 13 other restrictions. But they did 'not disclose' the fourteenth restriction, seemingly by their own choosing. This is not guess work on my part. You have to ask yourself why?

SNOOPY



Requirement for Substantial portion of business in New Zealand (Total Assets Maximum): Not disclosed

are you sure this is not the current arrangement and that the new structure will negate these footnotes as to the new structure will not fall under the rbnz rules as far as aus operations go

[Snoopy]

are you sure this is not the current arrangement and that the new structure will negate these footnotes as to the new structure will not fall under the rbnz rules as far as aus operations go


Yes I am talking about the current arrangement.

Yes the new rules will negate the 'no more than 33% of business outside of NZ' restriction, as well as removing oversight by RBNZ of the Australian assets.

But the current level of Reverse Mortgage business in Australia represents only 9.5% of total Heartland receivables, plus an unspecified, but small, amount of business lending 'on line'. It is way below 33% in total. I would guess well under half. So there is no need to make this change. The only thing the change will achieve in the short term is to remove the oversight of the Reserve Bank of NZ, a protection for shareholders. Why would you as a shareholder vote to remove the Reserve Bank of NZ oversight, when there is no short or medium term need to do so?

SNOOPY

[bull....]

Yes I am talking about the current arrangement.

Yes the new rules will negate the 'no more than 33% of business outside of NZ' restriction, as well as removing oversight by RBNZ of the Australian assets.

But the current level of Reverse Mortgage business in Australia represents only 9.5% of total Heartland receivables, plus an unspecified, but small, amount of business lending 'on line'. It is way below 33% in total. I would guess well under half. So there is no need to make this change. The only thing the change will achieve in the short term is to remove the oversight of the Reserve Bank of NZ, a protection for shareholders. Why would you as a shareholder vote to remove the Reserve Bank of NZ oversight, when there is no short or medium term need to do so?

SNOOPY

its probably already mentioned , but if you had an opportunity to expand the aus business rapidly and by listing in aus gave you better access to the funds , that would be why you would do the restructure now.

Even if a quick purchase wasnt on the cards the aus business is growing fast so would have to do the same at some stage anyway. doing it sooner i guess gives you flexibilty to move on opportunity.

[BlackPeter]

Yes I am talking about the current arrangement.

Yes the new rules will negate the 'no more than 33% of business outside of NZ' restriction, as well as removing oversight by RBNZ of the Australian assets.

But the current level of Reverse Mortgage business in Australia represents only 9.5% of total Heartland receivables, plus an unspecified, but small, amount of business lending 'on line'. It is way below 33% in total. I would guess well under half. So there is no need to make this change. The only thing the change will achieve in the short term is to remove the oversight of the Reserve Bank of NZ, a protection for shareholders. Why would you as a shareholder vote to remove the Reserve Bank of NZ oversight, when there is no short or medium term need to do so?

SNOOPY

Snoopy,

you make a lot out of RBNZ's oversight as protection for shareholders. Maybe you should talk with some CBL shareholders to find out how little regard the Reserve Bank has for shareholders of the organisations they oversee.

They said themselves during the still unfolding CBL disaster that it is not their role to protect shareholders. And that's exactly how they operate. I don't know whether they added so far any value to the CBL story, but certainly not for CBL share holders. Apparently they even forced the board to break continuous disclosure rules (quite funny that ...) which resulted in shareholders being kept in the dark for 6 months about the companies situation. Well, that's what the board is saying anyway. Worthy of an unregulated third world economy ... but New Zealand? Forget the RBNZ.

Why do you think their oversight would add value for HBL shareholders? I guess, sure RBNZ might know whether they go down the river, but they would not tell anybody ... certainly not the shareholders - and they would make sure that the board keeps this knowledge confidential as well.

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12009623

.

[percy]

its probably already mentioned , but if you had an opportunity to expand the aus business rapidly and by listing in aus gave you better access to the funds , that would be why you would do the restructure now.

Even if a quick purchase wasnt on the cards the aus business is growing fast so would have to do the same at some stage anyway. doing it sooner i guess gives you flexibilty to move on opportunity.
Most probably Australian banks,institutions,wholesale investor,trusts etc will be freer to invest in an Australian listed vehicle.

[Snoopy]

its probably already mentioned , but if you had an opportunity to expand the aus business rapidly and by listing in aus gave you better access to the funds , that would be why you would do the restructure now.

Even if a quick purchase wasnt on the cards the aus business is growing fast so would have to do the same at some stage anyway. doing it sooner i guess gives you flexibilty to move on opportunity.


The bit have have emboldened may be the key point. If there is a deal on table that Heartland are not telling us about, then what they are doing makes perfect sense. But if there is a deal on the table, why not tell us about it? Commercial sensitivity? There don't seem to be people lining up to buy REL portfolios in Australia though.



Most probably Australian banks,institutions,wholesale investor,trusts etc will be freer to invest in an Australian listed vehicle.


That is absolutely right Percy. There are many Australian pension funds that are greatly restricted on what they can invest in by where it is listed.

SNOOPY

[Snoopy]

its probably already mentioned , but if you had an opportunity to expand the aus business rapidly and by listing in aus gave you better access to the funds , that would be why you would do the restructure now.

Even if a quick purchase wasnt on the cards the aus business is growing fast so would have to do the same at some stage anyway. doing it sooner i guess gives you flexibilty to move on opportunity.


Snoopy,

you make a lot out of RBNZ's oversight as protection for shareholders. Maybe you should talk with some CBL shareholders to find out how little regard the Reserve Bank has for shareholders of the organisations they oversee.

They said themselves during the still unfolding CBL disaster that it is not their role to protect shareholders. And that's exactly how they operate. I don't know whether they added so far any value to the CBL story, but certainly not for CBL share holders. Apparently they even forced the board to break continuous disclosure rules (quite funny that ...) which resulted in shareholders being kept in the dark for 6 months about the companies situation. Well, that's what the board is saying anyway. Worthy of an unregulated third world economy ... but New Zealand? Forget the RBNZ.

Why do you think their oversight would add value for HBL shareholders? I guess, sure RBNZ might know whether they go down the river, but they would not tell anybody ... certainly not the shareholders - and they would make sure that the board keeps this knowledge confidential as well.

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12009623



I have read the referenced article and I do feel for all you CBL shareholders. I see there has been a three part series on the demise of CBL in the NBR over the last three weeks (starting in that 'Rich List' issue) . Well worth a trip to the library to read it all if you aren't a subscriber.

While we can't bring CBL back, it does seems lessons have be learned though. A 40% jump in numbers on the presently 10-person team managing regulation of the industry is a start. It looks like the reason that the July orders against capital movements from CBL accounts were kept secret because there were plans to possibly sell of pieces of CBL. And they didn't want the value of the company to affected during these sales negotiations. I would say that indirectly all this would have been in shareholders interests, had a partial sale of some business assets gone through. It is really only with hindsight that you can look back and say this was not in the interest of shareholders - because nothing ended up being sold.

Back to HBL and the RBNZ. I believe one of the things that the Resreve Bank follows is cashflows, or expected cashflows. This is particualrly important in the context of the historical collapse of the NZ finance industry during the GFC. If cashflows were not a problem then a company like Hanover would still be 'solid as'. The REL business is generally highly negative in cashflow while it is still growing. Cutting the arm of the business loose that is most likely to bleed cash is a real worry for me as a potential Heartland shareholder. As the debt cycle tightens it seems to be excatly the wrong thing to do at the wrong time from a risk perspective. If the reserve bank are happy for the REL business in Australia to grow by 100% without any capital restructuring (for that is what can happen by doing no restructuring) what is wrong with that? Why does Heartland want it to grow larger than this? I am not sure that shareholders fully understand the potential risks that Heartland will be exposing them to by wanting to grow the reverse mortgage business at a faster rate than the rest of the business.

SNOOPY

[ziggy415]

Record date is 7th, when is last day to buy to get divvy plz

[Beagle]

Wednesday 5th Sept.

[ziggy415]

Wednesday 5th Sept.
Many thanks

[percy]

HBL trading XD [ex dividend] today.

[Beagle]

Forecast eps 13.5 cps. Forecast dividends 9.5 cps fully imputed, (gross 13.194 cps)
HBL at a year low of $1.67. Forward PE just 12.37 and forward gross yield 7.9%. PE probably lower than most of the Aussie banks and yield definitely the highest on a net basis to Kiwi investors taking into account imputation credits. 8% forecast EPS growth this year and outstanding long term prospects for loan growth through reverse home mortgages.

Looks like RBNZ is going to cut and we're in for years of ultra low interest rates. Opportunity knocks at under $1.70 to lock in good yield and dividend growth in the years ahead ? You folks be the judge.

[dabsman]

I don't get it how cheap these are so picked up another bunch at $1.67 and $1.68. $2 end of year I reckon

[Snow Leopard]

I still have a few shares in the bank and today I got a reminder to vote at the meeting.

Voted against the restructure as per Snoopy's instructions, against re-electing the men and for re-electing the women and could not care about the auditors.

If this gets back down to under-priced I will add to the few.

[Snoopy]

I am not sure that shareholders fully understand the potential risks that Heartland will be exposing them to by wanting to grow the reverse mortgage business at a faster rate than the rest of the business.


I am not sure that I fully understand the potential risks that Heartland will be exposing shareholders to by wanting to grow the reverse mortgage business at a faster rate than the rest of the business. But after pondering on the proposal for a few days, here is my 2c worth on the topic.

There is no free lunch when a financial institution turns 'ordinary loans' into 'securitized loans'. That is the only bit that I am absolutely sure about. But where does the risk go if Heartland packages up their reverse mortgages in Australia and on sells them to Australians?

Heartland will make money because the interest they contract to receive from the reverse mortgage holder will be at a higher rate than the interest they pay out on the soon to be created Aussie bond supporting that loan.

The largest risk will be taken by the Aussie Bondholders. The Aussie bondholders will be being paid a higher than normal interest rate by Heartland (albeit still below what Heartland are getting for their reverse mortgage). But if some of those reverse mortgage loans end up being sold up and the capital released does not discharge the reverse mortgage, then those bondholders will take most -if not all- of the capital hit.

So far this sounds really good for Heartland. They clip the ticket on their REL loans and outsource much of the capital risk. Heartland's job is to match make REL loans with third parties that want to support them. But what happens if the 'matching' becomes difficult?

The ideal situation would be that the maturity terms of each reverse mortgage 'package' exactly matches the maturity terms of the equivalent third party funding package. But what would happen if there was a property market collapse? Suddenly all of those reverse mortgages that had 'responsibly' been limited to 60% of the value of the property value might overnight increase to 80% of the value of the property. And 'interest owed' by the property occupier would still be accumulating, leveraging the homeowners position even further. In that circumstance, the third party bondholders might rightly assess their risk has gone up. And they might elect to redeem rather than roll over their bonds at the end of the bond term. What would Heartland do in that circumstance?

One option (the only option?) would be to redeem the reverse mortgages early. Doesn't sound so bad. Until you realise what it means is 'sell houses' and throw old people out onto the street!

SNOOPY

[percy]

The average REL loan in NZ is just over $30,000 spread over 15,000 clients.
This works out between 5% and 10% of the house capital value.
This indicates RELs are very modest sized loans, compared to the security [house] taken over.
A lot of RELs have been taken out to do up houses ie new kitchen and bathroom so the house can be sold,therefore they have been repaid when the house has been sold.
You will not see old people put out onto the street.

[Snoopy]

The average REL loan in NZ is just over $30,000 spread over 15,000 clients.
This works out between 5% and 10% of the house capital value.
This indicates RELs are very modest sized loans, compared to the security [house] taken over.
A lot of RELs have been taken out to do up houses ie new kitchen and bathroom so the house can be sold,therefore they have been repaid when the house has been sold.
You will not see old people put out onto the street.


I think the issue is not what happens with the 'average' loan. $30,000 on a $600,000 house is only 5% of the capital value - not an issue. But an average is made up of a whole series of numbers that are higher and lower than the average. I would be concerned about those loans at the more highly leveraged end of the loan book. Even if only one or two pensioners were tipped out onto the street, would 'you' (as an institutional investor) be willing to back such a mortgage scheme by stumping up with wholesale funding for it? I see the situation as akin to investing in Casinos. 99% of customers can go for an evening at a casino and not suffer financial hardship and come away with their dignity intact. It is the 1% problem gambler that provides the ethical dilemma for investors. It will only take one or two elderly mortgage holders ending up on the street to taint the whole business.

I wouldn't expect this to happen in NZ. Heartland have a reputation to uphold and would likely bail out any pensioners that got themselves into REL trouble, out of fear that such suffering would damage the reputation of the rest of their business. But what I am talking about is what is proposed in Australia by the as yet unnamed umbrella company set up to do reverse mortgages 'over there'. Because Heartland hasn't given it a name yet, I will christen it "Heartless 'Stick it up the Ozzie Pensioners' Not a Bank Limited." There is no reputation to 'protect' with that one.

SNOOPY

[freddagg]

We can only guess at how it might work out. Ultimately, it comes down to whether you trust the directors to do their job or not.
I do trust them and have voted for the restructure, if I didn't trust them I would sell my shares.

[percy]

I think the issue is not what happens with the 'average' loan. $30,000 on a $600,000 house is only 5% of the capital value - not an issue. But an average is made up of a whole series of numbers that are higher and lower than the average. I would be concerned about those loans at the more highly leveraged end of the loan book. Even if only one or two pensioners were tipped out onto the street, would 'you' (as an institutional investor) be willing to back such a mortgage scheme by stumping up with wholesale funding for it? I see the situation as akin to investing in Casinos. 99% of customers can go for an evening at a casino and not suffer financial hardship and come away with their dignity intact. It is the 1% problem gambler that provides the ethical dilemma for investors. It will only take one or two elderly mortgage holders ending up on the street to taint the whole business.

I wouldn't expect this to happen in NZ. Heartland have a reputation to uphold and would likely bail out any pensioners that got themselves into REL trouble, out of fear that such suffering would damage the reputation of the rest of their business. But what I am talking about is what is proposed in Australia by the as yet unnamed umbrella company set up to do reverse mortgages 'over there'. Because Heartland hasn't given it a name yet, I will christen it "Heartless 'Stick it up the Ozzie Pensioners' Not a Bank Limited." There is no reputation to 'protect' with that one.

SNOOPY

Heartland's stated policy is fewer large loans and more smaller size loans,so I would doubt the average would be a few $1mil loans and a huge number of $3,000 loans.Does not make sense.More likely the odd $80,000 loan and a greater number of $20,000 loans.
Some would be $50,000 for a medical operation.
People taking out RELs have a unencumbered home.They are not gearing up to buy more property.

[percy]

We can only guess at how it might work out. Ultimately, it comes down to whether you trust the directors to do their job or not.
I do trust them and have voted for the restructure, if I didn't trust them I would sell my shares.

From day one when Heartland was formed, the directors have done what they said they would do.
With a lot of their own "skin in the game", directors and management have always acted prudently,honestly,and been part of our community.
Sound leadership.Good trustworthy team.
The opportunity to back their strong organic growth in Australian RELs should be taken.
To miss this opportunity would not be in Heartland shareholders best interest.
I too will be voting in favour of all resolutions.